THE RISE OF CONTINGENT FEE REPRESENTATION IN PATENT LITIGATION

THE RISE OF
CONTINGENT FEE REPRESENTATION
IN PATENT LITIGATION
David L. Schwartz
∗
ABSTRACT
It is well known that plaintiff-side contingent representation is on the rise in
patent litigation. But why? And what are the lawyers in the field like? Although
scholars have studied contingent litigation in other contexts — such as medical
malpractice, personal injury, and products liability litigation — patent litigation has
received almost no attention. This gap in the literature is unsettling because patent
litigation is different from these other fields of contingent litigation in important and
interesting ways. These differences include: patent litigation is much more uncertain;
the costs of litigating claims are usually significantly higher; and patents, including
their underlying infringement claims, are freely assignable. Absent in most other
contingent litigation contexts, these characteristics of patent litigation shed light on
the broader topics of litigation and contingency relationships in general.
Drawing upon several sources of data, including in-depth interviews with over
forty lawyers involved in contingent representation in patent litigation and
examination of over forty contingent fee agreements, this Article provides the first
comprehensive analysis of the rapid evolution of contingent representation in patent
law. The development of contingent representation includes top-tier litigation firms
recently transitioning to taking on high value contingent cases, small entrants
representing plaintiffs in lower value cases, and numerous general practice firms
experimenting with contingent patent litigation. These diverse players each select
and litigate cases using varied methods, resulting in different levels of risk and
reward. The Article uses the study of these players to discuss how and why attorneyclient contingent relationships established in the nascent marketplace of patent
contingent litigation differ from other types of contingent litigation, and what patent
law can teach about contingent representation in general. It also lays the foundation
for future quantitative research comparing the results of contingent and hourly
billing representation.
∗
Assistant Professor of Law, Chicago-Kent College of Law. I wish to thank David
Hyman______________________, and the participants at the 2011 Patent Conference at
the University of Kansas Law School, the 2011 IP Scholars Conference at DePaul University
College of Law, the Fueling Innovation Conference at the University of Missouri-Kansas City
School of Law, the Marquette IP Colloquium, and the Notre Dame Law School and
Chicago-Kent faculty workshops for their helpful comments and insights.
2
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
ABSTRACT ................................................................................................................... 1
I. INTRODUCTION ................................................................................................... 3
II. THE EVOLUTION OF PATENT CONTINGENT PRACTICE ........................ 8
A. CONTINGENT REPRESENTATION IN GENERAL ........................................................ 8
B. PATENT LITIGATION PRACTICE AND BARRIERS TO CONTINGENT PRACTICE.... 11
1.
Basics of Patent Litigation ........................................................................... 11
2.
Patent Litigation Compared to Other Areas with Contingent Practice ..... 13
C. EVOLUTION IN CONTINGENT REPRESENTATION IN PATENT LITIGATION ........ 17
III. QUALITATIVE INTERVIEWS OF LAWYERS............................................... 23
A. STUDY DESIGN AND METHODOLOGY ................................................................... 23
B. PROFILES OF PATENT CONTINGENT FEE LAWYERS ............................................. 24
1.
The “Top” of the Market ........................................................................... 29
2.
The Dabblers: Large GP Firms and Established IP Boutiques ................ 31
3.
Middle Market Contingent Firms ............................................................... 34
4.
The “Bottom” of the Market: Cost of Defense Litigation ......................... 36
C. WHO HIRES CONTINGENT FEE LAWYERS ............................................................ 38
1.
Individual Inventors and Small Businesses ................................................ 39
2.
Large Companies ........................................................................................ 41
3.
Large Patent Aggregators ............................................................................ 41
4.
Universities .................................................................................................. 43
5.
Small Patent Holding Companies .............................................................. 43
IV. THE MATURATION OF THE CONTINGENT FEE MARKETPLACE ....... 45
CONCLUSION ........................................................................................................... 50
METHODOLOGICAL APPENDIX ......................................................................... 52
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
3
DRAFT – WORK IN PROGRESS
“I want to hunt elephants, skin, and eat them.”
— Contingent fee patent litigator
explaining why he entered the practice
I. INTRODUCTION
In the last decade, a substantial market has begun to develop for
contingent fee representation in patent litigation. Wiley Rein — a traditional
general practice law firm with hundreds of attorneys practicing all areas of law
— represented a small company, NTP, Inc., in its patent infringement lawsuit
against Research in Motion, the manufacturer of the Blackberry line of
devices. The lawsuit famously settled in 2006 for $612.5 million, 1 and the
press reported Wiley Rein received over $200 million because it handled the
lawsuit on a contingent fee basis. 2 And Wiley Rein is not alone in doing so.
Many patent litigators around the country have migrated toward handling
patent cases on a contingent fee basis.
To place the market for patent contingent fee representation in context,
one needs to understand contingent fee representation in general. For
decades, contingent fee representation has been widely used in United States
civil litigation in many fields. In the typical case, an individual has been
harmed — such as by medical malpractice — but lacks the financial resources
to pay a lawyer on an hourly basis to litigate on his behalf. A lawyer agrees to
represent the injured individual in exchange for a percentage of the eventual
recovery, if any, from the wrongdoer. In this way, the lawyer shares in the
litigation risk because she only receives compensation for her legal work if
the client wins the case or receives a settlement. Academics have extensively
studied contingent litigation in fields such as medical malpractice, personal
The NTP v. RIM case was covered extensively in the press, including the
financial
details
of
the
settlement
itself.
See,
e.g.,
http://money.cnn.com/2006/03/03/technology/rimm_ntp/ (reporting payment by
RIM of $612.5 to settle the lawsuit); Teresa Riordan, Contest Over Blackberry
Patent,
N.Y.
TIMES,
June
7,
2004,
available
at
http://www.nytimes.com/2004/06/07/technology/07patent.html (last visited Jan. 30,
2012).
2
http://blogs.wsj.com/law/2007/04/30/hot-off-the-presses-the-amlaw-100/
(reporting that Wiley Rein broke the record for highest profits per partner ever
recorded by American Lawyer because it “earned more than $200 million in fees
from RIM [the Blackberry case]. It received approximately one-third of the $612.5
million settlement….”).
1
4
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
injury, workers’ compensation, and employment discrimination. 3 There is
relatively little literature on the nature of contingent representation in more
complex areas of law such as antitrust.
In the past, patent litigation was almost entirely performed on an hourly
fee basis rather than on a contingent fee basis. That made sense because
patent litigation appeared a poor candidate for contingent representation.
Among other reasons, patent cases were expensive to litigate, took years to
resolve, and outcomes on liability and damages were considered uncertain
and unpredictable. In contrast, personal injury cases are relatively inexpensive
to litigate, are adjudicated quicker, and often the liability of the defendant is
not seriously disputed.
With these impediments, why has a substantial market for contingent fee
patent litigation developed? This Article offers several reasons based upon
extensive interviews of patent attorneys. First, there have been several high
profile contingent lawyer successes in the last twenty years, especially in the
last ten years. These successes include those highlighted in a 1993 American
Lawyer cover story about patent contingency litigator Gerald Hosier, who
made over $150 million in a single year, 4 and the Blackberry case previously
mentioned. These highly visible victories encouraged hourly billing lawyers to
Herbert Kritzer is widely viewed as the leading academic on contingent fee
representation. He has written numerous articles and the seminal book in the field.
Herbert W. Kritzer, RISKS, REPUTATIONS, AND REWARDS: CONTINGENCY FEE
LEGAL PRACTICE IN THE UNITED STATES (Stanford Press 2004); see also Herbert
W. Kritzer, Seven Dogged Myths Concerning Contingency Fees, 80 WASH. U. L.Q.
739 (2002). There are others writing in the field as well. See, e.g., Stephen Daniels &
Joanne Martin, “It’s Darwinism – Survival of the Fittest:” How Markets and
Reputations Shape the Ways in Which Plaintiffs’ Lawyers Obtain Clients, 21 LAW
& POL’Y 377 (1999) [hereinafter Daniels & Martin, Markets and Reputations]; Jeff
Van Hoy, Markets and Contingency: How Client Markets Influence the Work of
Plaintiffs’ Personal Injury Lawyers, 6(3) INT’L J. LEGAL PROF. 345 (1999); Stephen
Daniels & Joanne Martin, It Was the Best of Times, It Was the Worst of Times:
the Precarious Nature of Plaintiffs’ Practice in Texas, 80 TEX. L. REV. 1781 (2002);
Steven Garber, Michael D. Greenberg, Hillary Rhodes, Xiaohui Zhuo, and John L.
Adams, Do Noneconomic Damages Caps and Attorney Fee Limits Reduce Access
to Justice for Victims of Medical Negligence, 6 J. EMPIRICAL LEGAL STUD. 637
(2009); Stephen Daniels & Joanne Martin, Plaintiff Lawyers: Dealing With the
Possible but not Certain, 60 DEPAUL L. REV. 337 (2011).
4
Stewart Yerton, The Sky’s the Limit, The American Lawyer, May 1993
(“Hosier says that his contingency fee for that work, and his revenue from other
clients, totaled about $150 million last year—more than the draws of all the equity
partners at New York's Cravath, Swaine & Moore and Chicago's Winston & Strawn
combined.”).
3
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
5
DRAFT – WORK IN PROGRESS
consider transitioning into contingent practice. Separately, the press coverage
encouraged small clients to attempt to monetize their patents, either by
assertion in litigation or sale to others.
Second, a new market for the sale and purchase of patents emerged.
Unlike causes of action in other contingent areas, patents and the right to
recover past damages are freely assignable. 5 If patent owners are unable to or
uninterested in filing a lawsuit to recover money, they can instead sell and
assign the patents and related causes of action to another entity. While
historically there had not been a significant amount of buying and selling of
freestanding patents, there is substantial evidence that the market for patents
has recently grown. In the past few years, there has been an explosion of
patent transactions in the news. In December 2009, Micron Technology sold
approximately 3,400 patents to Round Rock Research, LLC, a non-practicing
entity. 6 In August 2011, Google announced that it intended to purchase a
division of Motorola for $12.5 billion, and the primary reason for the
transaction was Motorola’s patent portfolio. 7 The month before, in July 2011,
Nortel sold its patent portfolio to a consortium of major IT companies for
$4.5 billion. 8 This publicity highlighted the value of patents, thereby
encouraging even the largest multinational corporations to carefully consider
how to monetize value from their patents, including evaluating selling a
portion of their patent portfolios.
After explaining why the contingent market has developed, this Article
describes the nascent marketplace of patent contingent fee litigators. 9 Because
See Mentor H/S, Inc. v. Med. Devices Alliance, Inc., 240 F.3d 1016, 1017
(Fed. Cir. 2001) (“Only a ‘patentee’ can bring an action for patent infringement. The
term ‘patentee’ is defined as including ‘not only the patentee to whom the patent was
issued, but also the successors in title to the patentee.’”); see also Sebok, supra note
61.
6
Tom Ewing & Robin Feldman, The Giants Among Us, 2012 STAN. TECH. L.
REV. 1, 17 (2012).
7
Shira Ovide, Google – Motorola: It’s All About the Patents, WALL STREET
JOURNAL, Aug. 15, 2011.
8
Elizabeth Woyke, An Inside on the Nortel Patent Auction and its
Consequence, FORBES, July 7, 2011.
5
For this study, I have omitted any analysis of partial hourly-partial
contingent or “blended” arrangements. There is a continuum in alternative
fee arrangements. At one extreme, there are cases in which all or substantially
all of the attorneys’ compensation is tied to the recovery, if any, by the client.
This extreme is the focus of the Article. I recognize that many cases are
handled on a discounted fee basis, with some reduction in the normal hourly
rate provided to the client. In a subset of these cases, there is also some
9
6
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
the market for contingent fee lawyers is still emerging, it is not transparent yet.
The inner workings of the market are not well known to academics nor are
they even fully understood by the lawyers who are litigating the patent cases.
To illuminate the market, this Article ventures into previously untapped
resources. Instead of relying on traditional sources like case law and theory,
this Article draws upon mostly unexplored sources of data, including in-depth
interviews with over forty lawyers involved in contingent representation in
patent litigation and analysis of more than forty contingent fee agreements. By
learning from the direct participants, this Article provides a rich description
of the major players in the market including their incentives and their
business models. Surprisingly, the market relating to patent contingent fee
representation is extremely diverse. The market includes experienced and
highly reputable trial lawyers; small contingent firms; and dabblers who
mainly work on hourly-billing cases. Several types of entities that work with
(and at times compete against) patent contingent fee lawyers also fill out the
patent contingent fee landscape. These entities include patent aggregators,
which purchase patents from other entities, and financing entities, which
invest in both patents and patent litigation.
For simplicity, based upon the empirical information collected and
described below, the market of contingent lawyers can be broken down into
the following segments.
•
•
•
Elite trial lawyers, including (i) former big firm patent trial lawyers and
(ii) top trial lawyers from other contingent areas of practice such as
tobacco litigation;
Big firm lawyers who work at national general practice firms or IP
boutiques that traditionally have used hourly billing, dabbling in
patent contingent litigation;
A large number of both new and established patent contingent law
firms who rely on the portfolio manager theory of contingent fee
litigation — overseeing a large number of cases to ‘risk pool’ and
uptick – such as a small contingent percentage or a multiple of foregone fees
– to the law firm in the event that the matter is resolved satisfactorily. These
“blended” arrangements – part contingent and part hourly billing – are also
worthy of study. However, blended arrangements are different from pure
contingent practice. Because pure contingent practice is broad, important,
and underexplored, I have focused on it exclusively in this Article. I have also
focused exclusively on contingent fee representation of patentees (generally
plaintiffs) in patent cases. I do not address the much smaller market for
contingent representation of accused infringers.
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
7
DRAFT – WORK IN PROGRESS
•
reduce the risks of each individual case; and
Small groups of lawyers who recently entered the market and litigate
patent infringement suits on behalf of single non-practicing entity
clients against a large number of defendants, seeking a relatively
smaller payout from each defendant.
Predicting the future of contingent patent litigation is difficult. The market
for contingent fee representation in patent law will become more mature in
the next several years. As markets mature, they generally become more
efficient and competitive. Currently the patent contingent market supports a
diversity of lawyers, litigation strategies, and patentees, but competition may
change this. There will always be individual and small corporate inventors
who are unable to pay legal bills on an hourly basis, and these are natural
clients of a contingent fee lawyer. But higher quality patent lawyers with
substantial litigation experience are being drawn into the market. They are
entering the market because there are stronger patents, both in terms of
infringement and validity, available for contingent litigation. These stronger
patents are available for litigation because of the increased fluidity of the
patent transaction market. The fluidity often results in patents being assigned
to entities more likely to sue. On the other hand, there have been a series of
court decisions in the last few years which have substantially weakened patent
rights and remedies. 10 Weaker patent rights lower the value of cases, which in
turn decreases the number of patents that are desirable to lawyers to litigate
on a contingent basis. The America Invents Act, adopted in September of
2011, also changes the law in a way that discourages contingent practice for
lower value cases, by prohibiting joinder of multiple unrelated defendants in
most circumstances. 11 At present, it is difficult to foresee what resolution these
contradictory forces will meet.
Understanding the market for contingent services in patent litigation also
can aid in understanding contingent representation more generally. Patents
differ in many important aspects from other areas which are generally
handled on a contingent basis. Some patent contingent fee lawyers initiate
multiple lawsuits over time involving the same patents but against different
These cases include, among other cases, eBay, Inc. v. MercExchange, LLC,
547 U.S. 388 (2006) (making it more difficult for a successful patentee to obtain a
permanent injunction); KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398 (2007) (making
it easier to invalidate a patent as obvious); and Uniloc USA, Inc. v. Microsoft Corp.,
632 F.3d 1292 (Fed. Cir. 2011) (making it more difficult for patentee to prove
damages).
11
The America Invents Act prohibits joinder of multiple unrelated defendants in
most circumstances. 35 U.S.C. § 299 (2012).
10
8
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
defendants. Obtaining settlements from earlier defendants permits the
patentee to accumulate money to fund later litigation, and also bolsters the
strength of the patent. 12 The ability to directly link multiple lawsuits is not
present in other areas of law. 13 It informs and refines the general theory
underlying contingent representation.
This Article proceeds in three additional Parts. In Part II, this Article sets
forth the forces that led to an increase in patent contingent litigation. It also
briefly explains patent litigation practice and discusses the prior literature on
contingent fee lawyers in other areas of law. In Part III, this Article describes
the qualitative interviewing methodology used in the present study. Part III
also provides vignettes of the types of lawyers involved in contingent fee
practice. Using the semi-structured interviews with contingent fee lawyers, the
Article paints a detailed picture of their motivations and strategies. The
Article concludes in Part IV with a prediction of the future of the
marketplace for contingent fee lawyers as it matures. It ends with a
description of what patent practice can teach us about contingent fee
representation in general. Further details on the interviews are provided in
the Appendix.
II. THE EVOLUTION OF PATENT CONTINGENT PRACTICE
This Part first briefly explains the general debate about contingent
representation in civil litigation. Turning to patent law, it explains the basics
of patent litigation practice, and then sets forth the various ways patent
litigation is different from other forms of civil litigation typically conducted on
a contingent basis, including how those differences theoretically should affect
whether lawyers choose to handle matters on a contingent fee basis. Finally, it
describes the major events in the development of patent contingent practice.
A. Contingent Representation in General
The basic economics of contingent practice are simple. Lawyers evaluate
cases by comparing the upsides and downsides of a case. The most important
upside is the potential monetary recovery. The downsides include the “cost”
to the lawyer to litigate the case (including attorneys’ fees and other costs) and
the chances that the litigation will be unsuccessful. The basic formula to
For a more complete discussion, see infra Part III.C.3.
In mass torts like the Vioxx litigation, separate individual cases are indirectly
linked because they have similar legal and/or factual questions. However, the result
in one case does not legally control the outcome in another. For the reasons
discussed in Part III.C.3, infra, patent cases are directly linked.
12
13
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
9
DRAFT – WORK IN PROGRESS
capture this is the same for all areas of contingent representation, although
for reasons discussed herein, patent law may require further refinement to
account for the linked nature of multiple cases involving the same patent.
The general formula can be simplified and reduced to the following formula:
Value = P(Recovery) * E(Damages) – E(Cost)
In this equation, P(Recovery) is the probability of winning on liability.
E(Damages) is the expected damage award. E(Cost) is the expected cost to
the law firm or lawyer of litigating until recovery; the costs include out-ofpocket expenses to the lawyer and the opportunity cost of the attorney’s time
spent on the case. A slightly more complicated formula would account for the
time value of money by including the duration a case will pend before
recovery. It would also account for the lawyer’s share of the recovery (e.g.,
33%, 40%).
While that basic formula is uncontroversial, there has been a long
standing and heated debate about the proprietary of contingent
representation in civil litigation. This Article will only briefly explain the
contours of that debate here. Critics of contingent representation argue that
contingent fee attorneys are often overcompensated and advocate more for
themselves than for their clients. 14 Lester Brickman, one of the most
outspoken critics, argues that contingent fees over-compensate attorneys
without any additional costs. He also argues that the risk of losing a lawsuit on
contingent fee has not changed in the past decade, while the effective hourly
rates paid to contingent fee lawyers have substantially increased. 15
The first claim, that contingent fee attorneys are often overcompensated,
is nuanced. Brickman draws his distinction between high recoveries for highrisk cases versus high recovery for low-risk cases. 16 Indeed, Brickman points
to the rise of high-recovery cases, like products liability, toxic torts, class
actions, medical malpractice, and the like, all which award much higher
judgments than the personal injury cases of previous decades. 17 This lack of
risk with substantial reward forms the unjustifiable aspect of contingent fee
litigation, according to Brickman, because it siphons off money from the
aggrieved when there was little legal skill necessary. 18 As for proof, Brickman
Lester Brickman, LAWYER BARONS (Cambridge Press 2011).
Id. at 33.
16
Lester Brickman, Effective Hourly Rates of Contingency-Fee Lawyers:
Competing Data and Non-Competitive Fees, 81 WASH. U. L.Q. 653 (2003).
17
Id. at 697. Brickman does not consider contingent representation in patent
infringement cases.
18
Id. at 694.
14
15
10
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
points to a study that shows “the average medical malpractice verdict
increased approximately 2200% over the last 40 years.” 19
Brickman also argues that the risk ratio has not changed in the past 40
years, while earnings have increased dramatically. 20 The effective hourly rates
have increased, according to him, around 1000-1400% since 1960, but the
risk of non-recovery is the same as it was then. 21 Thus, contingent lawyers are
merely taking money that should otherwise flow to the client, the aggrieved
victim.
Defenders of contingent representation offer several responses. Herbert
Kritzer, one of the leading scholars studying contingent representation,
contends that attorneys who work on a contingent fee basis do not make
significantly more than hourly fee attorneys. 22 The basis for Kritzer’s
statement is his empirical study of Wisconsin contingent fee attorneys.23
Kritzer finds that although the top income bracket of contingent fee litigators
make more than the top hourly fee litigators, for the most part, the lawyers all
have a comparable income. 24 His results are consistent with data that the
RAND Corporation collected in the early 1990s. 25 The RAND study
surveyed lawyers in cases filed in federal districts across the country. 26 The
RAND survey asked approximately how much time the lawyer spent on the
case, what the legal fees amounted to for the case, the amount of money at
stake, and how much money was eventually paid out. 27 Kritzer argues that his
findings of Wisconsin contingent fee lawyers are very similar to those of the
RAND Corporation study, which mainly are of hourly-billing attorneys. 28
Kritzer also asserts that contingent fee attorneys face risks to which hourly
fee attorneys are not exposed. 29 Most clear is the possibility that they will not
recover, or will recover less than the value of the time they invested in to the
Id. at 710.
Id. at 655.
Id. This claim has been challenged by Kritzer. See Herbert M. Kritzer,
Advocacy and Rhetoric vs. Scholarship and Evidence in the Debate over
Contingency Fees: A Reply to Professor Brickman, 82 WASH. U. L.Q. 477, 486
19
20
21
(2004) (asserting that a scientific study of 45 of the 75 largest counties found that the
average jury verdict was only $400,000, not the $1.4 million as Brickman suggested.).
22
Kritzer, Seven Dogged Myths Concerned Contingency Fees, supra note 3.
23
Id.
24
Id. at 764-65.
25
Id.
26
Id. at 743-44.
27
Id.
28
Id. at 772.
29
Id.
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
11
DRAFT – WORK IN PROGRESS
case. To try to counteract this risk, contingent fee attorneys act as
gatekeepers, choosing carefully which cases they will accept, based upon the
odds of recovery. 31 While they still do not recover in some number of cases,
they are able to act as an insurance company, spreading the risk of each case
among all their clients in order to protect against any one expensive loss (in
terms of lawyer time and out-of-pocket expenses). 32 Therefore, those cases
which collect money help subsidize the ones who do not. The subsidy
inherent in the system aids in making the contingent fee system accessible,
since the attorneys must front the capital.
Furthermore, Kritzer contends that contingent fee attorneys act in the
best interest of their client. 33 He argues that contingent fee attorneys are
dependent on referrals from their clients or repeat clients. 34 Repeat customers
and client referrals account for around 45% of the cases a contingent fee
lawyer obtains in Wisconsin. 35 Therefore, it is in the lawyer’s best interest,
Kritzer argues, not to shortchange the client because the attorney could easily
gain a bad reputation. 36
This Article does not enter the contentious debate about whether
contingent representation, on the whole, is good or bad. Instead, it analyzes
how the contingent market was developed in patent law, why, and how it will
look as it continues to mature.
30
B. Patent Litigation Practice and Barriers to Contingent Practice
There has been a recent rise in contingent representation in patent
litigation. That is somewhat puzzling because there are numerous reasons
that patent litigation appears to be a poor vehicle for contingent
representation. Before discussing these reasons, this Article first explains a
few basics about patent lawyer practice for those who are unfamiliar.
1. Basics of Patent Litigation
All patent litigation occurs in federal court, with trials occurring in the
district courts 37 and appeals decided by a single appellate court, the Federal
30
31
32
33
34
35
36
37
Id. at 766.
Id. at 754.
Id.
Id. at 774.
Id. at 751.
Id.
Id. at 766.
35 U.S.C. § 1338 (2011).
12
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
Circuit Court of Appeals in Washington DC (hereinafter “Federal Circuit”). 38
Furthermore, although the trial court litigation occurs in all federal judicial
districts (before generalist district court judges), 39 it is concentrated in a few
courts. 40 These courts reside in the larger metropolitan cities – Chicago, New
York, San Francisco, and Los Angeles – and the District of Delaware. 41 In
addition, certain other venues are popular for patentees because they are
perceived as fast and plaintiff-friendly attract cases. These have varied over
time; 42 most recently a key venue is the largely-rural Eastern District of
Texas. 43
Patent litigator practices are frequently national in scope. In other words,
patent litigators do not limit their practice to the state in which they reside. 44
Even in cases filed in the rural Eastern District of Texas, the lawyers on both
sides of the case are often from major metropolitan areas. 45
Another interesting aspect of patent litigation: the largest and most
prestigious firms represent both plaintiffs and defendants in patent cases. In
contrast, in other areas of law such as employment discrimination, large firms
only represent defendants. 46 This could be because there is no patent
28 U.S.C. § 1295(a)(1) (2011).
Recently, Congress adopted the Patent Pilot Program, which will experiment
with limited specialization of judges in patent cases in certain judicial districts. 28
U.S.C. § 137 (2012).
40
Mark A. Lemley, Where to File Your Patent Case, 38 AM. INTELL. PROP. L.
ASS’N Q.J. 1, 4-5 (2010) (Table 2).
41
Id. (reporting that the top five venues for patent cases 2000-2010 were C.D.
Cal. (Los Angeles area); N.D. Cal. (San Francisco area); E.D. Texas (Marshall,
Texas); N.D. Ill. (Chicago area); and S.D.N.Y. (New York).
42
For instance, in the early 1990s, the Eastern District of Virginia was popular.
Kimberly A. Moore, Forum Shopping in Patent Cases: Does Geographical Choice
Affect Innovation?, 79 N.C. L. REV. 889, 900 (2001) (referring to the Eastern
District of Virginia as the “rocket docket.”).
43
Julie Creswell, So Small a Town, So Many Patent Suits, N.Y. TIMES, Sept. 24,
2006 (describing the reasons that Marshall, Texas became a hot spot of patent
litigation.) In addition, the Western District of Wisconsin in Madison, Wisconsin is
very popular, as well as the International Trade Commission. The International
Trade Commission is less desirable for a contingent fee patent holder because it
cannot award monetary damages. However, a settlement of an International Trade
Commission investigation can include money.
44
On the other hand, in other areas like medical malpractice, lawyers have
entirely local practices. See Kritzer, RISKS, REPUTATIONS, AND REWARDS:
CONTINGENCY FEE LEGAL PRACTICE IN THE UNITED STATES, supra note 3.
45
Creswell, supra note 43 (stating that the lawyers are from major metropolitan
areas).
46
The larger firms represent only defendants in personal injury, medical
38
39
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
13
DRAFT – WORK IN PROGRESS
insurance generally available, 47 and thus there is no obvious organized
separation of plaintiffs and defendants. In patent cases, there is no stigma in
representing patentees in general, although as discussed later, a stigma has
developed in representing certain types of patentees. 48
With respect to fees, historically patent litigation was handled almost
exclusively on an hourly fee basis. Most patent litigation plaintiffs and
defendants were corporations which had the resources to pay lawyers their
regular hourly rates during the course of litigation. Patent litigators, like most
big firm lawyers, preferred this arrangement too because it resulted in low
risk for the law firm.
2. Patent Litigation Compared to Other Areas with Contingent Practice
Patent cases are different along a number of dimensions from the
stereotypical case brought on a contingent fee basis. Under the general
formula for contingent representation, most of these differences make it
appear that patent cases are more risky to the lawyer than other areas of law.
First, the fees to litigate a patent dispute are many times higher than those for
simpler causes of action. In part, this is due to unique issues in patent
litigation 49 and the breadth of documentary and electronic discovery. It is not
uncommon for the fees (including expert witness fees) to litigate a patent
infringement dispute to reach several million dollars. 50 Patent cases also
require a relatively long period of time to resolve. The average pendency in
malpractice, and class action cases.
47
Colleen V. Chien, Predicting Patent Litigation, 90 TEX. L. REV. 283, 295
(2011) (noting that the market for patent insurance is “extremely small and highly
inefficient.”).
48
Ashby Jones, When Lawyers Become ‘Trolls,’ WALL STREET JOURNAL, B1,
Jan. 23, 2012 (quoting Mark Lemley as saying “more and more, if you’re repping
trolls, corporate defendants don’t want to have anything to do with you.”).
49
One of these unique issues is called claim construction. In many cases, the
court will have separate briefing and a hearing to determine how to interpret the
patent claims. See generally Peter S. Menell, Matthew D. Powers & Steven C.
Carlson, Patent Claim Construction: A Modern Synthesis and Structured
Framework, 25 BERKELEY TECH. L.J. 713 (2010).
50
The largest IP trade association conducts a biannual survey of its membership
on various cost issues. Their 2011 survey pegged the average cost of patent
infringement litigation at $2,769,000 for a case worth from one million to twenty five
million; and at $6,018,000 for a case worth more than twenty five million. AIPLA
REPORT OF THE ECONOMY SURVEY I-153-54 (2011).
14
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
many high volume patent venues is longer than two years. 51 This matters
because of the time value of money and the fact that a contingent fee lawyer is
not paid unless and until there is a recovery. Both of these reasons combine
to make the “investment cost” of patent litigation high for a contingent fee
lawyer.
Furthermore, patent cases are also seen as highly unpredictable in terms
of outcomes, even more so than the most complicated antitrust cases. For
instance, one lawyer interviewed for this project who handles contingent
matters in a variety of complex fields including patent and antitrust summed it
up as follows:
There are more ways to lose a patent case than any other area….Patent
cases are harder to predict. In antitrust, it is pretty easy to zero in on the
major issues in the case. In patents, there are more potential issues and it is
more difficult to know which will be significant in litigation.
Patent cases are unpredictable in terms of liability, with substantial
uncertainty concerning key issues such as patent claim construction and
obviousness of the claimed invention. 52 There are two causes of this high
unpredictability: difficulty in knowing the relevant facts to the dispute; and
difficulty in knowing how a trier of fact will evaluate the facts, even if known.
The first cause is tied to, among other things, the issue of patent validity. A
patent infringement claim will fail if there is prior art – for example, an item
sold by a third party before the patentee’s invention – that is the same as the
patented invention or which renders the patent obvious. 53 Knowing the entire
universe of prior art is impossible before litigation commences. In litigation,
there is a strong incentive for a defendant to search broadly for prior art, and
the law expansively defines prior art to include hard to locate items such as
private sales transactions. 54 Accordingly, it is difficult to predict the likelihood
that a patent is valid before substantial litigation discovery. 55
Jay P. Kesan & Gwendolyn G. Ball, How are Patent Cases Resolved: An
Empirical Examination of the Adjudication and Settlement of Patent Disputes, 84
51
WASH. U. L. REV. 237 (2006).
52
Gregory Mandel, The Non-Obvious Problem: How the Indeterminate
Nonobviousness Standard Produces Excessive Patent Grants, 42 UC-DAVIS L. REV.
57 (2008) (arguing that the standard used by courts to determine whether an
invention is obvious is indeterminate).
53
35 U.S.C. § 102 deals with anticipation, while 35 U.S.C. § 103 sets forth the
defense of obviousness.
54
For instance, a single copy of a graduate thesis located in a single library in
Germany was found to be prior art because it was indexed and catalogued. In re
Hall, 781 F.2d 897 (Fed. Cir. 1986).
55
Even after full discovery, one study found 46% of litigated patents invalid. John
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
15
DRAFT – WORK IN PROGRESS
Separately, there is a high degree of uncertainty in how the patent claims
will be interpreted. Claims define the scope of the patent’s reach. 56 Even after
a district court has construed the claims, the appellate court reverses at a
seemingly high rate of approximately 30-40%. 57 There is also unpredictability
and variability in the amount of damages if liability can be established, with
plaintiff’s and defendant’s experts frequently disagreeing at trial by two orders
of magnitude. 58 Each of these factors, high investment costs and low
predictability of outcomes, makes contingent representation in patent
litigation highly risky for lawyers, at least according to the basic formula
advanced by scholars. 59
R. Allison & Mark A. Lemley, Empirical Evidence on the Validity of Litigated
Patents, 26 AM. INTELL. PROP. L. ASS’N Q.J. 185 (1992) (finding 46% of sample of
litigated patents were found invalid).
56
Markman v. Westview Instruments, 517 U.S. 370 (1996) (deciding that judges
must perform ‘claim construction,’ which involves determining the proper scope and
boundaries of the patent instrument.)
57
See David L. Schwartz, Practice Makes Perfect: An Empirical Study of Claim
Construction Reversal Rates in Patent Cases, 107 MICH. L. REV. 223 (2008)
(reporting that between 30 and 40% of appealed patent cases had to be reversed,
vacated, or remanded due to an error by the trial court judge in interpreting the
patent claims); David L. Schwartz, Courting Specialization: An Empirical Study of
Claim Construction Comparing Patent Litigation Before Federal District Courts and
the International Trade Commission, 50 WM. & MARY L. REV. 1699 (2009)
(reporting similar reversal rates over 2000-2008 time period); David L. Schwartz,
Pre-Markman Reversal Rates, 43 LOYOLA-LA L. REV. 1043 (2010) (reporting
similar reversal rates over period 1991-2008). This reversal rate appears to be much
higher than for other causes of action, and even for other issues within patent
litigation. See Ted Sichelman, Myths of (Un)Certainty at the Federal Circuit, 43
LOYOLA-LA L. REV. 1161, 1171-74 (2009) (showing that the reversal rate for nonclaim construction issues in patent litigation is 18%).
58
For example, in the pending patent dispute between Oracle and Google,
Oracle’s expert pegged damages at between $1.4 billion and $6.1 billion, while
Google’s expert assessed damages at $33 million. Jan Wolfe, Google, Oracle Battle
Over Damages, THE AMERICAN LAWYER (Dec. 7, 2011); see also Schwartz, PreMarkman Reversal Rates, supra note 57 at 1105 (“It is not uncommon for the
parties’ trial damages positions to vary by one and sometimes even two orders of
magnitude.”). On the other hand, empirical evidence suggests that actual damage
awards in patent cases may be predictable. Michael J. Mazzeo, Jonathan Hillel &
Samantha Zyontz, Excessive or Predictable? An Empirical Analysis of Patent
Infringement
Awards,
available
at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1765891 (last visited Jan. 21,
2012) (finding high correlation between damage awards and identifiable factors).
59
On the other hand, a typical patent has multiple claims. If the patentee prevails
16
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
However, there are also some differences between patent law and other
areas that render patent cases better vehicles for contingent representation.
One critical difference is the ability to assign claims. In patent law, the owner
of a patent may sell and assign the patent and the right to obtain past
damages. 60 The purchaser of these rights may then assert the patent in
litigation. The rule in most other tort contexts is the opposite. Victims of a
general tort of negligence, such one injured in a slip-and-fall accident, cannot
assign their cause of action to another. 61 Nor can the victim of medical
malpractice, or someone victimized by fraud. 62 Thus, there also are
alternative ways for the owner to obtain money from a valuable patent other
than suing.
Because of the ability to assign causes of action, patents are more likely to
be asserted. When the original owner of a patent is not interested in litigation,
the patent can still be asserted if it is purchased. Patent owners can sell their
patent to another who is more interested in enforcing the patent rights against
an alleged infringer. 63 In contrast, if the victim of another tort does not wish to
sue, then the wrongdoer escapes liability. As the market for patents increases,
more patents will end up in the hands of an entity interested in enforcement.
The injury in patent cases is also different. The injury is to the patent, not
necessarily to the patent owner, who need not even compete in the same field
on infringement and all defenses on even a single claim, it is entitled to damages.
Model
Patent
Jury
Instructions
3.1,
available
at
http://www.nationaljuryinstructions.org/documents/NationalPatentJuryInstructions.p
df (last visited Jan. 21, 2012) (providing instructions for jurors to determine if “one
or more” claims were infringed.)
60
See supra note 5.
61
Anthony J. Sebok, The Inauthentic Claim, 64 VAND. L. REV. 61, 75 (2011)
(“Almost all courts still refused to permit the assignment of personal injury claims,
but split on the reason for maintaining the prohibition.”); Michael Abramowicz, On
the Alienability of Legal Claims, 114 YALE L.J. 697 (2005) (considering the costs
and benefits of allowing freer assignments of legal claims.)
62
Id. at 86. Medical malpractice claims can be assigned to the insurer, but the
value is limited to the benefits paid to the insured, and not the value of the claim.
See Kenneth S. Reinker & David Rosenberg, Unlimited Subrogation: Improving
Medical Malpractice Liability by Allowing Insurers to Take Charge, 36 J. LEGAL
STUD. S261, S262-63 (2007). The law with respect to assigning fraud claims is not
uniform, with some states prohibiting their assignment and others allowing it. Sebok,
supra note 61 at 88.
63
This may be why there are more patent lawsuits. The weak-willed plaintiffs
assign their patents to stronger willed parties. More likely, a party which is wellfunded and knowledgeable about patents pays more for a patent than the owner
believes that it is worth.
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
17
DRAFT – WORK IN PROGRESS
as the infringer. Damages accrue from patent infringement whether or not
the patent owner makes a product, and even if the owner resides outside the
United States. There is substantial flexibility in how damages are calculated,
which may permit patentees to seek extremely high verdicts before a jury.65
And because patent infringement is a strict liability tort, no prior knowledge
of the patent by the infringer is necessary. 66 These factors combine to make
patentees eligible to receive compensation for infringement under a wide
variety of circumstances.
In sum, there are numerous reasons patent cases are different from other
cases typically brought on a contingent fee basis. These differences point in
different directions on whether patent cases would be likely to be litigated on
a contingent basis. Turning now to actual practice instead of theory, patent
litigators historically represented clients on strictly an hourly basis. But due to
a variety of factors, lawyers began representing patent owners on a contingent
basis.
64
C. Evolution in Contingent Representation in Patent Litigation
There are several noteworthy events in the path toward contingent
representation in patent litigation. To understand these events, one must
appreciate who litigated patent cases in the past. Up until at least the late
1980s, the patent bar was largely isolated. 67 Patent law was practiced almost
exclusively by specialty firms known as patent boutiques. 68 At these boutiques,
Over a hundred years ago, the Supreme Court held in a patent infringement
appeal that there is “the privilege of any owner of property to use or not use it,
without question of the motive.” Cont’l Paper Bag Co. v. E. Paper Bag. Co., 210
U.S. 405, 429 (1908).
65
Christopher B. Seaman, Reconsidering the Georgia Pacific Standard for
Reasonable Royalty Damages, 2010 BYU L. REV. 1661, 1665 (asserting that the
current law on patent damages results in some high and “unpredictable damage
awards.”).
66
Christopher B. Seaman, Willful Patent Infringement and Enhanced Damages
After In Re Seagate, 97 IOWA L. REV. 417 (2012) (“Patent infringement ‘is a strict
liability offense,’ and thus an accused infringer can be held liable for unintentional or
accidental infringement.”).
67
S. Jay Plager, Challenges for Intellectual Property Law in the Twenty-First
Century: Indeterminacy and other Problems, 2001 U. ILL. L. REV. 69, 76 (2001)
(“For a long time patent law was the province of a small number of practitioners in
boutique firms, working in an area of law that was foreign, if not largely unknown, to
the bar and the economy generally.”).
68
John M. Golden, The Supreme Court as “Prime Percolator”: A Prescription
for Appellate Review of Issues in Patent Law, 56 UCLA L. REV. 657, 684 (2009)
64
18
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
almost all of the lawyers had technical backgrounds, such as in engineers or a
hard science, and had passed a special bar examination known as the “patent
bar.” 69 The patent boutiques were successful, representing the major national
and transnational corporations in the administrative process of obtaining
patents for their inventions. 70
In this time period, patent boutiques also handled nearly all of the patent
litigation in the United States. This work, like most other work at boutiques,
was handled on an hourly-billing basis. When their clients desired to sue
another for patent infringement (or were sued themselves), they naturally
turned to their patent counselors at the boutique law firms. Perhaps due to
their training as engineering or their lack of exposure to general trial lawyers,
most patent litigators at the boutiques lacked the trial skills of general
litigators.
Patent law and practice changed after the creation of a national appellate
court to handle patent cases in 1982. 71 In the years immediately after its
formation, the Federal Circuit was viewed as more pro-patentee than the
regional circuits had been. 72 It was less inclined to affirm findings that patents
were invalid. 73 This had the effect of increasing the value of patents.
(stating that patent boutiques dominated the practice in the past.)
69
Roberta R. Kwall, The Intellectual Property Curriculum: Findings of Professor
and Practitioner Survey, 49 J. LEGAL ED. 203, 221 (1999) (stating that patent
boutiques required their lawyers to pass the patent bar.)
70
Larry Smith, IP Update: Outside, Inside Counsel in the Tug of War as
Profitability Soars, OF COUNSEL, Mar. 18, 1991 (stating that 15 in-house patent
counsel from major corporations reported that their patent counsel from boutiques
were so successful that they seemed arrogant.)
71
Rochelle C. Dreyfuss, The Federal Circuit: A Case Study in Specialized
Courts, 64 N.Y.U. L. REV. 1 (1989).
72
Robert L. Harmon, Seven New Rules of Thumb: How the Federal Circuit
Has Changed the Way Patent Lawyers Advise Clients, 14 GEO. MASON L. REV.
573, 574 (1992) (“When this author broke into the business, and for many years
after, it was quite clear that there was no such thing as a valid patent in the Eighth
Circuit, and the climate in the Ninth Circuit was not much more hospitable. In the
Seventh Circuit, on the other hand, patent infringement could get a client into big
trouble. Each of the other circuits occupied its own band in the enforcement
spectrum...”).
73
Among other things, the Federal Circuit articulated stringent requirements to
prove a patent invalid as obvious. See Emer Simic, The TSM Test is Dead! Long
Live the TSM Test! The Aftermath of KSR, What Was All The Fuss About?, 37
AM. INTELL. PROP. L. ASS’N Q.J 227, 232 (2009) (noting that many believed that
the Federal Circuit’s ‘teaching, suggestion, or motivation’ test for obviousness for
pro-patentee.)
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
19
DRAFT – WORK IN PROGRESS
There were also several high value damage awards in the late 1980s and
early 1990s. For instance, Polaroid was awarded nearly one billion dollars in
damages against Eastman-Kodak in 1990. 74 Separately, in 1992, Honeywell
settled a lawsuit it filed against Minolta for infringing patents covering autofocus technology for cameras for over $125 million dollars. 75 These cases
were reported extensively in the press, bolstering the view that patents could
be valuable if asserted in litigation. 76 As a result, more patents were asserted in
litigation. 77
By the mid-1990s, general practice firms became interested in developing
patent practices. 78 They realized that patent litigation was both “hot” and
could be financially lucrative. Patent cases were very document intensive
cases, requiring discovery into research and development records which may
span many years. 79 Consequently, these cases called for the staffing of a
significant number of lawyers and paralegals. General practice firms had a
desire for just these sorts of cases – cases for which numerous lawyers could
bill premium rates. To develop a patent practice, general practice firms
Polaroid Corp. v. Eastman-Kodak, Inc., 16 U.S.P.Q.2d 1481 (D. Mass. 1990),
17 U.S.P.Q.2d 1171 (D. Mass. 1990) (awarding $900 million in damages, although
the amount was later reduced to $873 million.)
75
Minolta Settles Suit on Honeywell Patents, N.Y. TIMES, March 5, 1992
(reporting a settlement of $127.5 million for settlement of patent infringement suit.)
76
Colleen V. Chien, From Arms Race to Marketplace: The New Complex
Patent Ecosystem and its Implications for the Patent System, 62 HASTINGS L.J. 297,
306-07 (2010) (arguing that successful litigation and licensing campaigns had
“demonstration effects” on others).
77
Alan C. Marco & Ted M. Sichelman, Do Downturns Dampen Patent
Litigation, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1641425,
(last visited Dec. 22, 2011) (see Figure 1 showing rise from approximately 1,000
patent lawsuits per year in 1990 to 2,500 patent lawsuits per year by 2000).
78
Rick McDermott, Lessons Learned From Fifteen Years in the Trenches in
Patent Litigation, 14 MARQ. INTELL. PROP. L. REV. 471, 478 (2010) (“Within
several years [of 1994], however, general practice firms started to enter the IP legal
market, either by establishing organically their own IP groups or by merging with or
acquiring IP boutiques or groups of lawyers from said boutiques.”); James F. Davis,
74
Judicial Management of Patent Litigation in the United States: Observations from
the Litigation Bar, 9 FED. CIR. B.J. 549 (2000) (“Since late 1980s, general practice
firms and litigation specialty firms have captured about half of the patent litigation
market.”).
79
Randall R. Rader, The State of Patent Litigation, Speech to E.D. Texas
Judicial Conference (Sept. 27, 2011) (“[T]he driving factor for that expense is
discovery
excess.”)
(available
at
http://www.patentlyo.com/files/raderstateofpatentlit.pdf) (last visited Dec. 19, 2011).
20
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
acquired many patent boutiques. 80 They also poached experienced patent
lawyers from the boutiques. 81
By the turn of the millennium, most American Lawyer 200 general
practice firms handled patent litigation matters – almost entirely on an hourlybilling basis. 82 In addition to the newly hired patent litigators, these firms often
utilized trial lawyers who had been commercial litigators or antitrust
litigators. 83 About this time, there was a sharp increase in the percentage of
patent infringement lawsuits with jury demands. 84 The reason for this increase
has never been fully explained, but in part it may be due to the rise of big
firm lawyers working on patent cases. 85
Patent cases began to appear more like other civil cases. They were
Numerous old-line patent and IP boutique law firms dissolved or merged with
general practice firms in the late 1990s and early 2000s. Steven T. Taylor, While the
80
Carnivorous Legal Market has Swallowed Several IP Firms, Some Find Ways to
Survive and Even Thrive, OF COUNSEL, July 2005 (noting that well known IP
boutiques Lyon & Lyon, Pennie & Edmunds, and Fish & Neave “have become
extinct.”).
81
Leigh Kamping-Carder, Why Some IP Boutiques Fail, Law360, March 15,
2010 (explaining that general practice firms have routinely raided senior patent
litigators from boutique firms.) Furthermore, I believe that more engineers began
enrolling in the top law schools. Those graduates, like other graduates at top law
schools in the 1990s and 2000s, frequently went to work at large, general-practice law
firms.
82
For several potential explanations why large firms prefer hourly fees, see Nuno
Garoupa & Fernando Gomez-Pomar, Cashing by the Hour: Why Large Firms
Prefer Hourly Fee Over Contingent Fees, 24 J.L. ECON. & ORG. 458 (2007).
83
Antitrust litigation work had largely dried up by the mid-1990s, and many of
these lawyers were searching for an area to transition into. See also Sean M.
McEldowney, The ‘Essential Relationships’ Spectrum: A Framework for Addressing
Choice of Procedural Law in the Federal Circuit, 153 U. PA. L. REV. 1639, 1658,
n.68 (2005) (noting that at general practice firms, “many experienced patent litigators
[] have come to patent litigation from general commercial litigation.”).
84
Until the late 1980s, relatively few patent infringement complaints contained a
jury demand. By the 2000s, nearly all of them did. See Kimberly A. Moore, Jury
Demands: Who’s Asking?, 17 BERKELEY TECH. L.J. 847, 850 (2002) (Figure 1);
David L. Schwartz, Explaining the Demise of the Doctrine of Equivalents, 25
BERKELEY TECH. L.J. 1157 (2011).
85
There are numerous alternative explanations, including that the judiciary’s
attitude toward patent cases changed. Under this theory, judges used to believe that
if a lawyer sought a jury trial for a patent case, then their case must be weak. The
judge would do all she could to resolve the case before a jury had a chance to
consider it.
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
21
DRAFT – WORK IN PROGRESS
litigated by lawyers with trial experience. 86 They were tried to juries instead of
the bench. 87 Large damages were possible. All of these made contingent
representation possible. And the increasing chance at success, brought in part
by the creation of the Federal Circuit, made the calculus easier to justify
contingent representation.
While almost all patent infringement cases were handled on an hourly
basis, there have been a small number of patent contingent cases and
litigators, some of which have been extremely high profile. In addition to
Gerald Hosier, who was mentioned in the Introduction, Raymond Niro and
his firm developed a reputation as widely successful patent contingency fee
litigators. 88 Alfred B. Engelberg also was reported to have made hundreds of
millions of dollars representing generic drug manufacturers on a contingent
basis in patent litigation. However, until the late 1990s, contingent
representation in patent law was very confined. More particularly, it did not
include any, or almost any, large general practice firms. 89
More recently, numerous big verdicts and settlements have been reported
as contingent wins. The Blackberry case was obviously one, with the patentee
receiving over $600 million dollars. But there are many others, including the
Eolas v. Microsoft case ($521 million, 2003), and i4i v. Microsoft case ($280
million, 2009). These awards, noted in the newspapers, encouraged others to
enter the contingent representation market.
Finally, the recent economic downturn may have affected patent
practice. 90 As large firms lost billable work, they were more willing to entertain
alternative fee arrangements with clients. 91 Also, laid-off attorneys had difficult
Davis, supra note 78 at 551 (noting that “corporate general counsel tend to
retain experienced trial lawyers (with or without patent law experience)”).
87
Moore, supra note 84.
88
Very few lawyers handled patent cases on a contingent basis in the 1990s. In
fact, Ray Niro worked with Gerry Hosier, then they separated and each embarked
on successful careers in contingent patent litigation.
89
Andrea Gerlin, Patent Lawyers Forgo Sure Fees on a Bet, WALL STREET
JOURNAL (June 24, 1994) (mentioning five lawyers who handle cases on a contingent
fee basis, all of whom are at very small firms.).
90
Others have studied whether economic downturns affect the quantity of patent
lawsuits filed. Alan C. Marco & Ted M. Sichelman, Do Economic Downturns
Dampen
Patent
Litigation?,
available
at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1641425 (last visited Jan. 14,
2012).
91
Victor Li, Study: For Law Firms, Cost-Cutting and Alternative Fees Here to
Stay,
AMERICAN
LAW
DAILY,
June
22,
2010,
available
at
http://amlawdaily.typepad.com/amlawdaily/2010/06/firmscuttingcosts.html
(last
visited Jan. 14, 2012) (stating that the largest law firms offer alternative billing after
86
22
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
times finding new employment. 92 Contingent practice may have gained from
these features of the downturn.
Another substantial change that affects contingent practice is that a more
sophisticated market for the purchase of patents has formed. Because patents
and the right to recover past damages are freely assignable, a non-litigious
patent owner can sell and assign the patent and the infringement claim to
another entity who is more interested in enforcement. As noted in the
Introduction, the market for patents has recently grown, with a huge uptick in
patent transactions appearing in the financial and business press. These
include Google’s $12.5 billion acquisition of Motorola 93 and Nortel’s $4.5
billion patent sale. 94 Almost every executive and business person is now
contemplating how to exploit value from their company’s patent portfolio.
Professor Colleen Chien previously described the changing ecosystem of
the patent system. 95 She wrote that companies that do not assert their patents
against a rival for fear of inciting a retaliatory patent infringement
counterclaim now can consider selling or licensing their patents to patent
holding companies. These patent holding companies are free to litigate
without fear of a counterclaim because the holding companies do not make
any products themselves. And often these patent holding companies rely
upon contingent fee lawyers to enforce the patents.
These forces have combined to make patent litigation amenable to
contingent practice. However, the overall contour of the contingent fee
market in patent litigation is largely unexplored. To the author’s knowledge,
there have been no academic studies of contingent representation in patent
law. This Article attempts to fill that void, explaining how contingent
representation in patent litigation has expanded in the last decade and where
it may be headed in the future. Understanding contingent practice in patent
law will aid our understanding of contingent practice more generally.
the recession).
92
Jordan Weissman, What Do Lawyers and Bankers Have in Common? They
Lost Jobs in 2011, THE ATLANTIC, Jan. 12, 2012 (finding that thousands of law jobs
were lost in 2011.) i
93
Shira Ovide, Google – Motorola: It’s All About the Patents, Wall Street
Journal, Aug. 15, 2011.
94
Elizabeth Woyke, An Inside on the Nortel Patent Auction and its
Consequence, Forbes, July 7, 2011.
95
Chien, From Arms Race to Marketplace: The New Complex Patent
Ecosystem and its Implications for the Patent System, supra note 76.
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
23
DRAFT – WORK IN PROGRESS
III. QUALITATIVE INTERVIEWS OF LAWYERS
This Part describes the market for contingent fee litigation in patent law.
In Section A, it sets forth the study design and methodology relating to the
semi-structured interviews and content analysis of contingent agreements. It
continues in Section B with vignettes of various types of contingent lawyers
active in patent law. Finally, in Section C, it expounds on the clients who hire
contingent lawyers in patent litigation.
A. Study Design and Methodology
For this study, original data was gathered from two main sources. First, a
series of semi-structured interviews was conducted. Second, copies of
contingent fee agreements were obtained. Below I briefly describe both
sources.
Turning first to the interviews, I interviewed forty-one lawyers and
business people associated with contingent litigation in patent law during
2010 and 2011. 96 The interviews took on average one hour to complete. A
majority of the subjects were lawyers whose practice was all or substantially all
plaintiff-side patent contingent work. I also interviewed lawyers who handled
some patent infringement matters on a contingent fee basis, but also handled
other matters on an hourly-billing basis.
To obtain balanced information about litigation, lawyers whose practice
consisted of defending against contingent fee patent litigation were also
interviewed. I also spoke with lawyers at several large and mid-sized patent
aggregators, as well as business people (not lawyers) in the financing industry.
The subjects were chosen by a non-random “snowball” sample technique,
Qualitative interviewing has been previously used in the study of patent lawyer
behavior. See, e.g., William T. Gallagher, IP Legal Ethics in the Everyday Practice
of Law: An Empirical Perspective on Patent Litigators, 10 J. MARSHALL REV.
INTELL. PROP. L. 309 (2011); Stefania Fusco, The Patentability of Financial
Methods: The Market Participants’ Perspective, LOYOLA LA L. REV. (forthcoming
2012) (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1800853)
(reporting the results of structured interviews about financial method patents). It has
also been used extensively in other studies of lawyer and law firm behavior. See, e.g.,
Lynn Mather, Craig A. McEwen & Richard J. Maiman, DIVORCE LAWYERS AT
WORK (Oxford Press 2001); Robert L. Nelson, PARTNERS WITH POWER
(California Press 1988); Felice J. Batlan, “If You Become His Second Wife, You
96
Are a Fool”: Shifting Paradigms of the Roles, Perceptions, and Working Conditions
of Legal Secretaries in Large Law Firms, 52 STUD. IN L., POL., AND SOC’Y 169
(2010).
24
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
which starts with certain known subjects and relies upon referrals and other
sources for additional subjects. 97 Further information about the interviews and
methodology can be found in the Appendix.
In addition to the qualitative interviews, I obtained copies of forty-two
contingent fee agreements. Most of these agreements were obtained from the
interview subjects or directly from others who have litigated on a contingent
fee basis in the patent field. A small number of the agreements were located
in court files via Pacer. While some descriptive information about these
agreements is provided in the Article, a caveat is appropriate: these
agreements are also not a random sample of the population of contingent fee
agreements. 98
B. Profiles of Patent Contingent Fee Lawyers
This Section presents general vignettes of patent contingent lawyers.99
Before doing so, I discuss significant points of agreement among all or
substantially all of the interviewed contingent lawyers. After discussing the
various places in which all lawyers agreed, I move to differentiate four
different types of patent contingent lawyers.
The contingent lawyers agreed to a large degree on numerous points.
First, the lawyers all agreed that they performed substantial due diligence
before agreeing to represent a client on a contingent fee basis. Most lawyers
stated that they spent over forty hours reviewing a potential claim, with some
asserting as much as several hundred hours of due diligence. 100 Attorneys
spent time reviewing the patent and the related patent file (including the
“prosecution history” or the interactions that the patent applicants had with
the U.S. Patent & Trademark Office during pendency of the application).
The due diligence time also includes an attempt to construe the patent claims
and perform an evaluation of the infringement allegations, a validity analysis,
See Michael Lewis-Beck, Alan Bryman & Tim F. Liao, THE SAGE
ENCYCLOPEDIA OF SOCIAL SCIENCE RESEARCH METHODS 1043-44 (2003).
98
Because most of the party names were redacted in the agreements, I cannot
ascertain whether the agreements are associated with either completed cases or
plaintiff victories.
99
The information in this Section derives primarily from the in-depth interviews.
The descriptions should be viewed with appropriate caution given that there are
limitations of individual recollections and potential self-interest by the interview
subjects. The Article attempts to identify contested claims, presenting multiple
viewpoints. Furthermore, because the sample was not randomly generated, caution
should be used before drawing inferences about the population of patent contingent
litigation.
100
[INSERT median and n]
97
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
25
DRAFT – WORK IN PROGRESS
and a damages assessment. Occasionally contingent firms hired outside
experts (at the firms’ expense) or had prior art searches conducted to aid in
assessing the case.
The contingent lawyers also agreed that they are, for the most part,
selective at choosing which clients and cases to accept. As discussed below,
there is some variance on the level of selectivity. However, on the whole, the
lawyers were all selective – no one indicated that they accepted more than a
third of potential opportunities. 101 At the most selective level, the lawyer
turned down over ninety-nine percent of potential cases. Lawyers declined
cases for various reasons, including weak infringement cases, weak validity
cases, low damages, 102 and concerns about the client. 103 Concerns about the
client included, for example, the reasonableness of the client’s expectations
with respect to settlement. 104 The most common reasons for declining the
case were weak infringement allegations and insufficient damages. 105
The contingent lawyers obtained clients from a variety of sources. The
most common was referrals from other lawyers. 106 Some of these referring
lawyers were other patent lawyers who did not work on a contingent fee basis.
Other referring attorneys were lawyers in other fields such as general litigators
or corporate lawyers at different law firms. Unlike other areas of law, the
interviewed contingent lawyers indicated that referral fees are not commonly
used in patent litigation. As discussed below, some contingent lawyers
received referrals from other, more selective patent contingent fee lawyers.
Another source of clients was repeat business. Some clients own multiple
As a point of comparison, Kritzer reports that the aggregate acceptance rate
for general contingency fee lawyers is forty-two percent. Kritzer, RISKS,
REPUTATIONS, AND REWARDS: CONTINGENCY FEE LEGAL PRACTICE IN THE
UNITED STATES, supra note 3 at 71.
102
As discussed in the subsequent sections, there were various cutpoints on
minimum damages. However, it was quite common for a one million, five million or
ten million dollar floor.
103
The percentage of cases which fell into each category varied by the lawyer, but
most lawyers placed a significant percentage in each one.
104
Another common scenario was a client who was moving a contingent case
from one law firm to another. This was viewed as a red flag — a hard-to-satisfy client.
105
For general contingency fee lawyers, by far the biggest reason for declining
cases was lack of liability. Kritzer, RISKS, REPUTATIONS, AND REWARDS:
CONTINGENCY FEE LEGAL PRACTICE IN THE UNITED STATES, supra note 3 at 85.
106
Kritzer and Kirshnan report that, for general contingency fee lawyers, client
referrals are the largest source of clients. Lawyer referrals are the second most
common source. Herbert M. Kritzer & Jayanth K. Krishnan, Lawyers Seeking
101
Clients, Clients Seeking Lawyers: Sources of Contingency Fee Cases and Their
Implications for Case Handling, 21 LAW & POL’Y 347, 351 (1999).
26
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
patents or portfolios of patents and assert these patents against many accused
infringers. When a law firm successfully represents one of these parties on a
contingent fee basis, the firm is more likely to be engaged for future work. A
minority of the contingent clients were previously hourly-billing clients who
decided to litigate a particular case on contingency. Sometimes the case was
not as competitively important to the client – they may only bring the suit if
done on contingency. In other circumstances, an hourly-billing client has cash
flow issues and asks for the case to be converted to a contingent fee basis. In
addition, some of the law firms who engage in contingent fee practice have
quite sophisticated PR operations. When they are successful in a case, they
broadly announce the victory. This leads the public to hear of the firms, and
aids in development of future clients. Finally, clients hear about contingent
fee law firms from other clients.
According to the interviewed attorneys, the desirable defendants were
clustered in certain industries. At the most simplistic level, a good contingent
fee case involves a potentially high damage award. High awards are related to
infringing sales because a common measure of damages in patent cases is a
reasonable royalty. Thus, companies who sell a huge amount of a single or
small number of infringing products are ideal. Companies who sell large
numbers of products, each with only a modest amount of sales, are less
desirable. Consequently, consumer electronics, online businesses, and
medical devices were mentioned as industries well suited to patent contingent
practice. 107
The agreements used by patent lawyers in contingent practice are similar
to and yet different from general contingent agreements. On the whole, the
contingent rates are similar to the “one third” that a stereotypical contingent
personal injury lawyer charges. 108 There are two main ways of setting the fees
for the contingent fee lawyer: a graduated rate and a flat rate. Of the
agreements using a flat fee reviewed for this Article, the mean rate was 38.6%
of the recovery. 109 The graduated rates typically set milestones such as
“through close of fact discovery,” “through trial,” and “through appeal,” and
tied rates to recovery dates. As the case continued, the lawyer’s percentage
increased. Of the agreements reviewed for this Article which used graduated
Accord Colleen V. Chien, Of Trolls, Davids, Goliaths, and Kings: Narratives
and Evidence in the Litigation of Hi-Tech Patents, 87 N.C. L. REV. 1571 (2009)
107
(noting a higher percentage of NPE suits in “hi-tech” areas).
108
Kritzer, RISKS, REPUTATIONS, AND REWARDS: CONTINGENCY FEE LEGAL
PRACTICE IN THE UNITED STATES, supra note 3, at 39 (“Of those with a fixed
percentage, one-third was by far the most common, accounting for 93% of the fixed
percentage fees….”).
109
Only ten agreements used a simple flat contingent fee calculation.
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
27
DRAFT – WORK IN PROGRESS
rates, the average percentage upon filing was 28% and the average through
appeal was 40.2%. 110
The contingent fee agreements were substantially longer and more
detailed than contingent fee agreements used in other areas of law.
Notwithstanding their length and complexity, the lawyers reported that two
specific provisions were frequently negotiated, and the remainder was
accepted as is. The two negotiated clauses were the contingent percent, and
whether the law firm advanced the costs of the litigation. 111 Of those
interviewed, there appeared to be a split in whether law firms were willing to
advance litigation costs, and this split did not appear to be correlated with the
prestige or experience of the law firm. 112
Most lawyers whose practice consists of substantially all patent contingent
litigation are primarily and historically patent litigators. They are not former
medical malpractice, personal injury, or other tort lawyers. 113 Instead, their
background usually is having worked as an hourly-billing patent litigator.114
They considered themselves as risk-takers. 115
All of the contingent lawyers stated that they billed fewer hours than
opposing counsel in patent litigation. 116 Sometimes the contingent lawyers
believed to be less than half or even a quarter of the legal expenses of the
defendant. This cost imbalance could be due to a variety of factors, including
that non-practicing entities or individual inventors have far fewer documents
than alleged infringers. The fewer documents translate into lower e-discovery
Thirty two agreements used a graduated contingent rate.
The costs in patent cases can be very expensive, ranging from several hundred
thousand dollars to several million dollars. These include expert fees, deposition
costs, document copying fees, travel expenses, and other non-lawyer fees.
112
Advancing costs until resolution of the dispute is common in other fields of
contingent practice. Herbert M. Kritzer, 47 DEPAUL L. REV. 267, 270 (1998) (“Very
often, lawyers also defer the collection of expenses until the close of a case.”).
113
Cf Ronen Avraham & John M. Golden, From PI to IP: Yet Another
Unexpected
Effect
of
Tort
Reform,
available
at
papers.ssrn.com/sol3/papers.cfm?abstract_id=1878966, last visited Dec. 22, 2011).
114
Accord Steven T. Taylor, As Plaintiffs Firms Seek a Share of the IP Litigation
Workload, They Hire Away Big-Firm Attorneys to Help Them, OF COUNSEL,
June, 2010.
115
Part of the risk-taking extended beyond their professional endeavors. One of
the lawyers interviewed raced cars as a hobby.
116
In other field of law, researchers have empirically estimated attorney effort in
contingent fee and hourly-billing relationships. Herbert M. Kritzer, et al., The
Impact of Fee Arrangement on Lawyer Effort, 19 LAW & SOC’Y REV. 251 (1985).
They found that “contingent fee lawyers put in less effort for small cases than do
hourly fee lawyers, but they put in more time for “big” cases.” Id. at 267.
110
111
28
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
and other document production issues. It could also be that contingent
lawyers litigate more cost effectively or efficiently. 117 Efficiency could be due to
a closer alignment of lawyer and client incentives. The contingent lawyer may
be more careful on how many hours are spent on a project because they are
essentially ‘paying’ the bill. 118
One final point that everyone agreed upon: there are no “slam dunk”
patent cases. All patent cases have substantial risk of a complete loss on the
merits. It is just not possible ex ante to precisely evaluate a patent and its
corresponding infringement and validity contentions to confirm that the case
will succeed. 119
Without distracting from these large points of agreement, it is fair to say
that the market for contingent fee patent litigators is diverse. The four
different types of lawyers and firms are summarized in Figure A below, along
with some associates traits of each type. 120
Colleen V. Chien, Turn the Tables on Patent Trolls, FORBES (August 9,
2011) (arguing that trolls are more efficient at monetizing patents in part because of
reliance upon contingent lawyers).
118
Some interviewed lawyers expressed the opposite concern. More particularly,
some stated that because no outside client was monitoring the reasonableness of the
contingent bills, some lawyers – especially those without enough work – pad their
bills on contingent matters. This concern was limited to firms whose practice
consisted of a mixture of hourly-billing and contingent matters.
119
I also interviewed contingent lawyers in other “complex” areas of law such as
antitrust and securities fraud litigation. In these areas, the cases were deemed much
more predictable. Often there were public events (such as criminal convictions)
which showed that the liability phase of the case would be extremely strong.
Damages in many cases were uncertain. In patent cases, both the liability and
damages components had extreme uncertainty. There is also frequent risk-sharing
among contingent firms in these other areas of law. The lawyers co-counsel cases,
allowing them to split the work (and the risk) and share the rewards. The large
players in the patent contingent market rarely, if ever, co-counseled cases with other
large players. The risk was borne solely by the one firm selected by the patent
holder.
120
Another simpler division of contingent fee lawyers is those whose goal is to
reach a trial, and those whose goal is to provoke a settlement. Because the goal is
different, these cases are litigated quite differently by their lawyers. One defense
lawyer speculated as to how a contingent law firm selects which of the two different
approaches to used. According to this lawyer, the strategy is typically driven by how
much money the plaintiff seeks.
117
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
29
DRAFT – WORK IN PROGRESS
Figure A:
Typology of Law Firms Handling Contingent Patent Litigation
Firm Type
Top Tier
GP/Boutique Middle
Market
Firm Size
Small
medium
Client
Selection
Most
selective
Most
selective
Case
Selection
Single
or
small
number of
defendants
Single
or Varies
small
number of
defendants
Litigation
Strategy
Litigates
aggressively,
at least on
key issues
Varies
–
attempts to
litigate
economically
or Big
(or Small
patent
boutique)
Bottom Tier
Small
Moderate to Moderately
highly
selective
selective
Single
portfolio
against large
number of
defendants
Litigates
Litigates
economically economically
or
“war
chest”
Below I describe the type of lawyers in each category, their case selectivity,
and their litigation strategy and philosophy. 121
1. The “Top” of the Market
The highest rung on the patent contingent ladder is occupied by a small
and elite group of lawyers and firms. 122 There are several distinct types of
lawyers that fit in this category. In addition to a few very established patent
contingent boutique firms, there are two distinct types of newcomers to the
top of the market. First are the most elite patent trial lawyers in the country,
who usually worked as senior partners at the largest and most prestigious law
These are composition sketches and are not meant to represent any particular
lawyer or law firm. Because of that, some lawyers and firms do not neatly fit into the
breakdown I have provided.
122
Others identified a similar category of “heavy hitters” plaintiff attorneys in
personal injury law. See Daniels & Martin, Markets and Reputations, supra note 3 at
382.
121
30
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
firms. The second subgroup in the top of the market includes elite plaintiff
trial lawyers from other complex areas of contingent litigation. These lawyers,
who have litigated tobacco, antitrust, and other high-end contingent cases,
have recently transitioned into patent litigation. Both subgroups of lawyers
perform all or substantially all of their work on a contingent fee basis.
These elite lawyers are highly selective in choosing which cases to accept.
Generally, they turn down ninety percent or more of the contingent
opportunities presented to them. They select cases which they perceive to be
strong on the merits, and importantly, to have extremely high potential
damages. For example, one lawyer in this category explained: “$25 million
expected value against one infringer. That’s the general rule.” Others had
similar high cut points, saying things like “we’d like to be at $100 million on
our cases. Those are good cases. The very least, I don’t take a case unless we
think we could pull in well into 8 figures.”
123
The lawyers generally elect to litigate against a single or small number of
accused infringers, each with a large exposure. 124 To litigate those cases, the
lawyers split on how aggressive an approach was required toward litigation.
Some of these lawyers stated that an aggressive litigation approach is
frequently needed. When confronted with a large claim for damages,
defendants will litigate before considering settlement. As one lawyer noted:
[when] you are asking people to write [checks that] are sufficiently large []
they can’t write them without the Sword of Damocles of a jury verdict or
[an] ITC injunction hanging over their heads.
Many of these lawyers litigate very similar to the big firm “no stone unturned”
Two high profile examples are John Desmarais and Matthew Powers. In
2010, John Desmarais, one of the top patent litigators in the country, resigned from
his position as a senior partner at Kirkland & Ellis and formed a plaintiff-side firm.
D.M. Levine & Claire Zillman, The Lateral All-Stars: The Most Significant Partner
Moves of 2010, American Lawyer (Feb. 1, 2011) (“In a move that shocked the IP
world, Kirkland & Ellis’s John Desmarais jumped from one side of the patent fence
to the other.”). Similarly, Matthew Powers, another of the top patent litigators in the
country, left Weil, Gotshal & Manges in the summer of 2011 to form a plaintiff-side
patent firm. Ed Shanahan, Switching Sides, American Lawyer (July 25, 2011)
(Matthew Powers, cochair of litigation at Weil, Gotshal & Manges, was leaving the
firm after 18 years to start his own plaintiff-side shop.”).
124
This is not a hard and fast rule. Sometimes additional defendants are included
in the case for reasons relating to venue. Specifically, it is more difficult for a district
court to transfer a case to another venue if there are multiple defendants, each from
different regions of the country. For this reason, additional defendants, even if
economically insignificant, may be strategically important to maintaining the
plaintiff’s choice of venue.
123
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
31
DRAFT – WORK IN PROGRESS
methodology. One lawyer noted:
You do everything you can to win the case and you plan for trial. Most
[contingent] firms take the other approach. It’s all cost benefit, and they
are looking for really minimizing their cost. We don’t operate like that. It
serves our purposes because the result of what we do, if done right, is a
victory. There is no way to establish a reputation without victories.
Some of these lawyers use a version of the cost/benefit model of litigation.
As former trial lawyers, they are very knowledgeable about what information
they need during discovery. They seek that information and attempt to
minimize other irrelevant discovery.
The role of reputation is important, especially among this top tier of
litigators. They want to win big verdicts or settlements, which are useful in
generating positive press reports. While money and success and important,
the role of reputation is also very important.
As previously discussed, a stigma has developed in representing certain
types of patentees. More particularly, patent holding companies, which buy
patents merely for the purposes of asserting them in litigation, have become
less desirable as plaintiffs. Lawyers in the elite category are most likely to turn
down this class of plaintiff in their entirety.
2. The Dabblers: General Practice Firms and Established IP Boutiques
Many large general practice and established intellectual property boutique
firms consider and often do handle patent cases on a contingent fee basis.
These firms generate a substantial percentage of their revenues from the
typical hourly-fee billing model. However, to supplement their income, they
“dabble” in contingent patent litigation.
As for selectivity, these firms are highly selective. They often spend
hundreds of hours conducting due diligence before deciding whether to
accept a case. They also have several layers of internal review before a case
can be accepted by the firm. For example, there is frequently a committee
assigned to hear propositions for contingent fee. It is also common to have a
second, higher ranking committee – such as a management committee –
required to provide final approval. These additional layers of bureaucracy
make the process slower, and thus harder, to quickly vote to take a case.
General practice and established boutique firms litigate against a single
defendant or a small number of defendants. They rarely take more than a
few patent contingent cases at any given time, and commonly have only one
or two. Part of the reason for this is legal conflicts. The more accused
infringers included in the litigation, the more clients which the firm may have
a legal conflict now or in the future. Plus, the more likely that one of the
32
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
firm’s clients perceives the litigation as a business conflict. It can be a business
conflict because some clients dislike non-practicing entities and their business
model. Consequently, these large firms only take cases with very high damage
potentials, which are quite difficult to locate. As one big firm lawyer
explained:
The multiples required to take contingent cases are too high. We will
spend a couple of million dollars on attorneys’ fees. Even with a 40%
contingent share, we need at least $5 million in damages to break even. If
we use the venture capitalist model that we fund 10 cases to win 1, then we
need $50 million in damages in each case [which is], 10 times $5 million.
$50 million in damages requires a billion dollars in sales at a 5%
reasonable royalty, half a billion at a 10% royalty, and a quarter billion at
20% royalty. Cases of these high sales and/or high royalties are very rare.
And we may spend $5 million not $2 million, because a defendant being
put at risk of a $50 million judgment will fight at a higher level, which
makes the multiples even worse.
Big firms and established boutiques litigate patent contingency cases on a
cost/benefit basis. They often attempt to litigate sparingly, attempting to
perform the minimal work to take the case toward trial. Unfortunately, there
are numerous problems with the non-contingent firm’s execution of this
strategy. This is not to say that big firms are always unsuccessful at contingent
fee litigation. As previously noted, Wiley Rein was amazingly successful in its
execution of contingent patent litigation. However, below the Article outlines
several of the problems that appear to affect firms which only experiment
with contingent fee patent litigation.
First, firms which focus on hourly billing matters have less skill at
accurately predicting the attorneys’ fees required in a case. In the present
legal environment, it is not uncommon for hourly billing lawyers to provide
their clients with budgets at the commencement of a case. However, if the
legal fees exceed the budget, the lawyer experiences less of a direct
repercussion. To be sure, the client may be upset. But the client also must
pay the bill. 125 As one big firm lawyer said, “Big firms aren’t good at evaluating
the costs of litigation. They don’t have any idea how much they spend on
various tasks.” Contingent lawyers, because their business depends upon it,
are much more realistic in assessing the potential attorneys’ fees required in a
case.
Furthermore, big firms are frequently not as good as evaluating the
In fact, there is some business pressure for a lawyer to under quote the case to
the client when the client is selecting counsel. If the case is over-budget several years
later, the law firm will be so knowledgeable about the facts that a change in counsel
will be unfeasible. While such a strategy has long-term downsides, there are some
financial pressures at law firms to engage in this activity.
125
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
33
DRAFT – WORK IN PROGRESS
likelihood of resolution of a case on the merits. This is not because big firm
lawyers are not good lawyers — along many measures they are better lawyers
than contingent lawyers. However, big firm litigators typically handle large
cases. These large cases frequently settle. Consequently, they have less
experience with how the trier of fact would ultimately resolve of the issues,
and may have less experience with how patent cases in particular settle.
Third, it is extremely difficult for big firms to litigate on a cost/benefit
basis. It is antithetical to the way that these lawyers practice. On hourly billing
matters, there is an incentive to rely upon the aggressive “no stone unturned”
strategy for litigation. These lawyers spend substantial time preparing letters,
let alone briefs, with several lawyers reviewing each paper in the case. This
careful approach makes for excellent work product. However, these lawyers
frequently find it difficult to change gears and litigate in a hyper-efficient
manner. For example, one former big firm lawyer noted:
You are put under more pressure at a larger firm to make sure you are
crossing all your T’s and dotting your I’s….I think when I was at a big firm,
there was more of a tendency to be willing to go off on boondoggles in the
thought of seeing if maybe something was there. I can’t really recall a
specific situation where anything major came up, but it cost money to the
other side so it caused problems. Now [at a contingent firm] it is more
focused on ‘these are the elements I need to prove for infringement’,
‘these are the elements I need to prove for willful infringement,’ so let’s
focus on that.
Fourth, big firms do not staff contingent cases in the same manner as an
experienced contingent lawyer would. As another big firm lawyer articulated:
“Big firms often staff the least busy and cheapest lawyer on the case, even
though this isn’t optimal.” By assigning lawyers who lack billable work and
who may not be the right fit for the case (either because of their technical or
legal skills), the big firm lawyer reduces the likelihood that the case will be
successful.
Finally, there are various compensation issues that affect big firm practice
when contingent matters are accepted. 126 Most partnership agreements at large
law firms do not specifically address how to distribute contingent awards or
how to credit partners (and associates) for work done on contingent fee
matters. These matters are debated within the firms, often in closed door
meetings. 127
One lawyer explained how contingent cases distract other lawyers at the firm.
Other partners want to follow the progress of the case because their compensation is
tied to the contingent case. When those other partners have little or no experience
with patent litigation, they fail to appreciate the risks and costs in the case.
127
These issues are sufficiently important and complicated that I plan to address
126
34
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
As is evident from some of the quotations in this Section, there is
considerable sniping among the various segments of contingent lawyers. Big
firm lawyers often view small firm lawyers as extortionists or as lawyers who
do not practice law at a ‘high level.’ Small firm lawyers, in turn, think big firm
lawyers are wasteful and inefficient. These stereotypical views mirror those of
big firm and small firm lawyers outside of patent law.
3. Middle Market Contingent Firms
There are numerous small law firms that focus predominately on patent
contingent litigation. Within this category, there is great diversity along many
aspects. Some of these firms are highly selective in taking cases, almost as
selective as the most elite lawyers. Others are moderately selective.
These lawyers generally litigate on a cost-benefit model. They do not
litigate on a no-stone unturned method. As for overall case strategy, there are
two main ones. First, some firms utilize the “portfolio” theory, which involves
accepting more cases to smooth out the risk. Basically, firms take ten or more
contingent cases understanding that some of these cases will lose. By having a
range of cases at all times, the firm reduces the market risk on its portfolio of
cases. 128 Each case also has the chance at winning substantial damages, and
some believe that patents operate like lottery tickets. 129
Second, some firms rely upon the “war chest” model of litigation. 130
them in a future article.
128
For a general discussion of the portfolio theory of contingent litigation, see
Kritzer, RISKS, REPUTATIONS, AND REWARDS: CONTINGENCY FEE LEGAL
PRACTICE IN THE UNITED STATES, supra note 3.
129
The lottery ticket analogy is that a random few patents are worth a huge
amount of money. See Dennis D. Crouch, The Patent Lottery: Exploiting
Behavioral Economics for the Common Good, 16 GEO. MASON L. REV. 141
(2008); Mark A. Lemley & Carl Shapiro, Probabilistic Patents, 19 J. ECON.
PERSPECTIVES 75 (2005).
130
Raymond P. Niro, Are Alternative Fee Structures Becoming a Necessary
Alternative to Hourly-Rate Calculated Fees?, AIPLA Mid-Winter Meeting (Jan. 2730, 2010) (“In a second case, a trial was also necessary, but only after our client had
collected substantial amounts in settlement. That trial also proved successful, with an
award of damages many times the settlement amount that was initially proposed.
From a strategic standpoint, this enforcement effort (like most that involve multiple
infringers) can be successful only if the client is willing to take reasonable settlement
amounts early. Once a war chest has been developed (and chips taken from the
table), then the risk of a finding of non-infringement or invalidity is diminished and
the likelihood of a ‘roll-the-dice’ mentality increases. When you already have
millions in the bank, why not take the risk of a trial for significant damages?”)
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
35
DRAFT – WORK IN PROGRESS
Under the war chest model, the patent or portfolio is infringed by at least a
few defendants. Rather than suing them all at once, the patentee asserts its
patent in waves. Typically, weaker defendants are approached or sued
initially. Alternatively, a lawsuit includes only a subset of all infringers and
includes a mix of weaker and stronger defendants. Weaker defendants can
include companies with weaker non-infringement positions, companies with
smaller exposure (perhaps due to a smaller volume of infringing sales),
companies known to settle early, and smaller companies with more limited
litigation resources.
Settlements generated from the weaker defendants are used for two
separate purposes. One purpose is to bolster the case against later
defendants. The case improves because the early settlements can be used as
evidence in subsequent cases that the patent is not-obvious. 131 It also can be
used as evidence of a reasonable royalty rate.132 For each of these reasons,
early settlements strengthen the patent. 133 Furthermore, the settlements can be
to build a war chest. This means that the money is used to pay experts,
lawyers, and other people in the subsequent case. It also means that the later
cases can be litigated more aggressively – at least in terms of experts – and
some money can be provided to the client and contingent lawyers. 134
See, e.g., WMS Gaming Inc. v. Int'l Game Tech., 184 F.3d 1339, 1359 (Fed.
Cir. 1999) (citing licensing as evidence of "industry respect"); James Gibson, Risk
Aversion and Rights Accretion in Intellectual Property Law, 116 YALE L.J. 882, 929
(2007) (explaining that “whether the patent owner has successfully licensed the
invention to others in the industry” is relevant to the issue of obviousness.)
132
Other licenses of the patent-in-suit are one of the reasonable royalty factors
enumerated in the famous Georgia-Pacific case. Georgia-Pacific Corp. v. U.S.
Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970) (setting forth the first
factor of a reasonable royalty damages analysis as: “The royalties received by the
patentee for the licensing of the patent in suit”). There is some disagreement among
courts as to whether litigation settlements are admissible. See, e.g., Douglas
Dynamics, LLC v. Buyers Prods. Co., No. 09-CV-261-WMC, 2010 WL 4118098,
at *1 (W.D. Wis. Oct. 8, 2010) (“[b]ecause determining a reasonable royalty is a
fact-specific inquiry dependent on the consideration of many factors, even licenses
arising from resolution of unrelated patent litigation can ordinarily be considered.”);
but see Vardon Golf Co. v. BBMG Golf Ltd., 156 F.R.D. 641 (N.D. Ill. 1994)
(stating that, because of Federal Rule of Evidence 408, “amounts paid in as
settlements may not be used to compute a reasonable royalty.”).
133
On the flip side, if the patent is found invalid in any lawsuit, it is invalid against
the world. Blonder-Tongue v. University of Illinois Found., 402 U.S. 313 (1971)
(finding that a holding of invalidity is binding under the doctrine of collateral
estoppel against the patentee in subsequent litigations).
134
Mark Lemley, Josh Walker, and John Allison report that the most litigated
131
36
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
Eventually, the patentee engages in a drawn-out battle against a large
defendant, with the hope of obtaining a huge settlement or verdict.
4. The “Bottom” of the Market: Cost of Defense Litigation
At the “bottom” of the patent contingent market are very small patent
contingent firms. 135 These firms are typically small groups of patent litigators
(with between one and ten lawyers) that have recently cropped up and handle
mainly patent contingent matters. They are moderately selective at choosing
cases to litigate. Sometimes they receive referrals from other lawyers “higher”
on the contingent food chain. They perform a fair amount of due diligence,
at least more than twenty hours, before accepting cases.
One distinguishing characteristic of these law firms is that they often
litigate on behalf of a single client or enforce a single patent or related
portfolio of patents. Their clients are commonly non-practicing entities. The
patents are enforced against an entire industry, or alternatively against a slew
of defendants in a single lawsuit. They litigate these cases very sparingly,
attempting to avoid motion practice and substantial discovery. 136
The most controversial aspect of their practice relates to settlement.
Often these lawyers will propose settlement amounts which are lower, often
far lower, than the amount which it will cost an accused infringer to defend
patents are adjudicated invalid at higher rates than once-litigated patents. See John R.
Allison, J.H. Walker & Mark A. Lemley, Patent Quality and Settlement among
Repeat Patent Litigants; 99 GEO. L.J. 677 (2010). The war chest theory may offer a
relatively innocuous explanation for their findings. If the most litigated patents were
litigated using a war chest theory, then the largest defendants were sued last. At that
point, the smaller defendants have all settled and there is little incentive to not
aggressively litigate the patent against the final, larger alleged infringers.
135
There is one group that was universally considered below this group of
lawyers: patent brokers. Patent brokers are not lawyers; they are business people
who attempt to pair a patent owner with someone to help him or her monetize the
patent. The general consensus was that patent brokers were the lowest on the
proverbial food chain. A typical comment was that “they prepare very basic claim
charts and market analysis. Their work product is unhelpful.” The only value they
appear to provide is occasionally identifying patents to contingent fee lawyers.
136
In other contingent areas, there is evidence that fee arrangements influence
the amount of work done by lawyers on smaller cases. Herbert M. Kritzer, William
L.F. Felstiner, Austin Sarat & David M. Trubek, The Impact of Fee Arrangement
on Lawyer Effect, 19 LAW & SOC’Y REV. 251 (1985) (“For modest cases (with stakes
of $6,000 or less), contingent fee lawyers spend less time on a case than hourly fee
lawyers”).
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
37
DRAFT – WORK IN PROGRESS
itself. It is not uncommon for settlement demands to be in the range of
$100,000 or $250,000, even though the cost of litigating the case for an
accused infringer would be close to one million dollars per year.138 It should
be noted that just because someone offers to settle for less than the cost of
defense, it does not necessarily follow that their patents are weak. Defense
lawyers unanimously argued that these patents were, in fact, weak.139 One
defense lawyer said that the patent lawsuits which sought cost-of-defense
settlements were “very, very weak. Almost ridiculous.” Another said:
137
I’ll send you the patent my client was just sued on. I bet your engineers [at
the Illinois Institute of Technology] can’t read the patent and guess even
which industry my client is in, let alone the product. The patent is being
stretched beyond belief.
Other plaintiff contingent lawyers higher on the prestige ladder complained
about this practice. 140 One said “It is a form of extortion to demand a number
so small that the defendant can’t afford to fight.”
The plaintiff lawyers involved in this practice strongly dispute any such
implication. One explained the cost-of-defense settlement demands as
follows:
The more a patent is litigated, it tends to decrease in value as people come
up with better prior art or over-analyze the thing. An NPE [non-practicing
In class actions, judges and others have complained that certifying a class puts
unfair pressure on defendants to settle. In some ways, this is similar to the original
high cost of litigation in patent disputes. For an excellent discussion of this issue in
class actions, see Charles M. Silver, We’re Scared to Death: Class Certification and
Blackmail, 78 N.Y.U. L. REV. 1357 (2003). Others have referred to this in the
patent context as “holdup licensing.” Mark A. Lemley, Rational Ignorance at the
Patent Office, 95 NW. U. L. REV. 1, 21 (2001) (“Patent owners might try to game the
system by seeking to license even clearly bad patents for royalty payments small
enough that licensees decide it is not worth going to court.”). Some have called these
‘nuisance’ settlements. Christopher A. Harkins, Fending Off Paper Patents and
137
Patent Trolls: A Novel ‘Cold Fusion’ Defense Because Changing Times Demand It,
17 ALB. L.J. SCI. & TECH. 407, 410 (2007) (stating that some patents are asserted for
the “purpose of extorting nuisance settlements”).
138
Phillip B. Philbin, et. al., The EDTX and Local District Courts: Advancing or
Stifling Innovation?, 14 SMU SCI. & TECH. L. REV. 269, 282-83 (2011) (reporting
comments from two patent litigators indicating that patentees in large, multidefendant cases sometimes are willing to accept settlements around $200,000.)
139
One defense lawyer was emphatic that all patent cases were extremely weak,
and the weak cases were not limited to the cost-of-defense cases.
140
Sannu K. Shrestra, Trolls or Market-Makers? An Empirical Analysis of
Nonpracticing Entities, 110 COLUM. L. REV. 114 (2010) (setting forth the competing
arguments about “trolls”).
38
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
entity] intuitively understands that we could go for triples or home runs,
but we can also go for singles and get a good return and work on other
things…. The licensor is of the view that we don’t want to fight so price at a
level to where it is attractive not to fight. That doesn’t equate to lack of
merit of the cases…. It is just leaving money on the table.
According to this lawyer, the clients are merely sophisticated parties willing to
take less than they are entitled to in order to maintain the viability of the
patent. 141 A different explanation offered by another attorney is that some
patents have lots of infringers with small damages. While it is conceded that
the damages owed are less than the cost of defense, that result is not unfair. If
the patentee did not collect these damages, then the infringer would receive
an unfair benefit from infringing without liability. 142 The empirical evidence
on these claims is mixed, with some scholars arguing that the patents are
weaker and some arguing that they are not. 143
C. Who Hires Contingent Fee Lawyers
This Section describes the clients who select contingent fee lawyers to
represent them. These include individual inventors, small companies, large
patent aggregators, one-off patent acquirers, universities, and large
companies. As the market for contingent services has matured, most clients
shop their cases around to multiple law firms.
The client mix varies by lawyer, but individual inventors, small
businesses, and patent holding companies were the main types of clients.
Universities and large practicing entities were mentioned much less frequently
as clients. In fact, only one lawyer had an active practice representing
universities on a contingent basis.
Michael Risch has discussed the litigation strategy of settling cases to increase
the value of the patent to future licensees. Michael Risch, Patent Challenges and
Royalty Inflation, 85 IND. L.J. 1003, 1025 (2010) (asserting that settling cases “may
also make the patent appear stronger, thus increasing the possibility of higher
royalties on future licenses.”).
142
Both of these rationales should be empirically evaluated to determine how
frequently, if at all, they occur.
143
Michael Risch, Patent Troll Myths, 42 SETON HALL L. REV. (forthcoming
2012) (asserting that the quality of patents asserted by NPEs is not drastically lower
than that of other litigated patents); Allison, Lemley & Walker, Patent Quality and
Settlement among Repeat Patent Litigants, supra note 134 (asserting that the most
litigated patents, which are disproportionately owned by NPEs, are “weak patents”
which are found invalid at higher rates than other litigated patents).
141
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
39
DRAFT – WORK IN PROGRESS
1. Individual Inventors and Small Businesses
Individual inventors are key users of contingent representation in patent
litigation. These inventors are awarded approximately ten to fifteen percent
of all patents. 144 Their story — of the “garage” inventor — has long been
important in patent law and the public’s perception of patent law. 145 This class
of patent holder almost always relies upon contingent representation for
patent lawsuits. The reason is simple: patent litigation is too expensive for
almost any individual to afford. Consequently, the only way which individual
patent owners can litigate is on contingency. 146 From the contingent lawyers’
perspective, an individual inventor with a strong patent is an ideal client. This
stems from the conventional wisdom that the public (which includes potential
jurors) views individual inventors as very important. 147 The jury sympathy to
the individual inventor is frequently amplified because the defendant is a
large corporation.148
The U.S. Patent & Trademark Office reports on the number of patents issued
to individual inventors each year. In 2000, for instance, for instance, the Office
reported that 14% of patents were issued to U.S. or foreign individuals. Patenting by
Organizations Report, 2000, at A1-2. In 2005 and 2010, the Office reported that
10% and 7%, respectively, of patents were issued to individuals. Patenting by
Organizations Report, 2005, at A1-2; Patenting by Organizations Report, 2010, at
A1-2.
145
Christopher A. Cotropia, The Individual Inventor Motif in the Age of the
Patent Troll, 12 YALE J. L. & TECH. 52 (2009) (“The drive and ingenuity of these
small inventors is the life-blood of American innovation.”).
146
Interestingly, the possibility of contingent representation in litigation may
affect individual inventors’ behaviors much earlier in the process. When individuals
or small companies are considering whether to seek patent protection in the first
instance, they frequently know that it is very expensive to “defend” their patent in
litigation. In these instances, they are frequently unsure whether to apply for a
patent, even if they can afford the cost of drafting a patent application. The
possibility of contingent representation in any subsequent litigation encourages small
inventors to file the application as it defuses the concern.
147
Philip K. Anthony, George E. Badenoch, & Eric J. Lobenfeld, How Jurors’
Attitudes and Perceptions Influence Decisions in Patent Cases, 949 PLI/Pat 305
(2008) (“[I]nventors are seen as underdogs in any contest with a corporate entity.
David always has the advantage over Goliath, at least in any contest for the sympathy
of jurors.”).
148
Joseph J. Ortega & Peter S. Massaro, Defending Goliath: How to Represent a
Corporate Defendant Before a Jury in a Weaken Economy, (ABA 2010) (available
at
http://apps.americanbar.org/litigation/committees/corporate/docs/2010-clematerials/02-corporate-america-jury-verdict/02a-defending-goliath.pdf)
(“For
decades, trial attorneys have generally assumed that corporate defendants are always
144
40
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
Small businesses also are often clients of contingent lawyers. Because of
the high cost of patent litigation, many small businesses cannot afford hourlybilling lawyers. When these small businesses are the original owners of the
patents, 149 contingent lawyers believe that they are make desirable plaintiffs.
And if the small business tried to compete in the marketplace, even if it
failed, it is an extremely desirable plaintiff.
Alternative litigation financing is theoretically an option for these entities
and is a substitute to contingent representation. 150 In alternative litigation
financing, a financing entities lends money to patent holders to finance
litigation. The financing entities take a percentage of the recovery in exchange
for money used to engage hourly billing lawyers. 151 These entities indirectly
compete with contingent fee lawyers.
Alternative litigation financing is used in other areas of law. 152 Outside
funding is possible for expenses, including legal fees as well as expert fees and
other costs. 153 This area is rather underdeveloped at present in the United
States. 154 At present, there are numerous financing entities willing to consider
investing in patent cases. However, as discussed below, there are few
financing deals consummated. The patents that investors are interested in are
typically held by individuals, small businesses, and sometimes holding
at a disadvantage in a jury trial.”).
149
In other words, the patents were not purchased from an unrelated business.
150
It is also a substitute to selling one’s patent to a non-practicing entity. Steven
Garber, Alternative Litigation Financing in the United States: Issues, Knowns, and
Unknowns (RAND 2010) at 37 (“ALF can be a fairly close substitute for selling the
patent to an NPE.”).
151
Larry E. Ribstein, The Death of Big Law, available at
http://works.bepress.com/ribstein/22 at 45 (last visited Jan. 21, 2012) (noting that
investors in litigation financing receive a share of the proceeds from a lawsuit).
152
Marco de Morpungo, A Comparative Legal and Economic Approach to
Third-Party Litigation Funding, 19 CARDOZO J. INT’L & COMP. L. 343 (2011)
(noting that U.S. alternative litigation financing is typically “small scale and consumer
oriented.”).
153
In the lending for consumers to pursue legal claims, the maximum amount
advanced is relatively low. George S. Swan, Economics and the Litigation Funding
Industry: How Much Justice Can You Afford?, 35 NEW ENG L. REV. 805 (2001)
(reporting a maximum of $20,000 advance to individual plaintiffs). General, systemic
information about ALF such as investments in commercial claims and loans to
plaintiff’s firms are unavailable. Garber, supra note 150 at 13-15.
154
For an economic model of patent troll litigation financing, see Keith N.
Hylton, The Economics of Third-Party Financed Litigation, BU Working Paper,
available at http://www.bu.edu/law/faculty/scholarship/workingpapers/2011.html, last
visited Dec. 22, 2011).
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
41
DRAFT – WORK IN PROGRESS
companies. This investment can take a variety of forms – debt, equity, etc. –
depending upon the desires of the players and the features of the deal.
There is also tremendous demand from investors looking for investment
opportunities. Patents as assets are seen as uncorrelated with the stock
market, which permits them to be held to reduce risk. However, while many
investors will consider investing in patent cases, the due diligence process
limits the number of investors who actually pull the trigger and invest. After a
thorough review, the cases are viewed as very risky. Most investors decline
after analyzing the merits and potential payoffs.
2. Large Companies
Occasionally, large practicing entities rely upon contingent representation
in patent litigation. This is the smallest slice of contingent clients. These
companies frequently have the resources to pay their counsel on an hourly
basis. However, for business reasons, they sometimes elect to engage
contingent lawyers. These include budgetary reasons – the legal department
may not have sufficient money to enforce a patent; and strategic reasons – the
patent does not cover a core technology and it would not be otherwise
asserted. Law firms, even those unaccustomed to handling matters on a
contingent basis, are often willing to forge a special arrangement for their
long-standing, existing clients. There are also times when a large company has
financial problems, and pending cases are converted from hourly-billing to
contingent at the client’s request.
But for their most valuable patents in their central areas of competition,
these large companies generally hire hourly-billing lawyers. Many believe that
the fees paid to a contingency lawyer may be too large to justify in these high
value cases. 155 They also frequently rely on large firm or established boutique
lawyers for these matters, and these lawyers prefer hourly-billing rather than
contingency.
3. Large Patent Aggregators
There are numerous entities which acquire multiple patents with an eye
toward monetizing them. 156 Some of the largest and most well-known of these
These cases are sometimes handled on a blended contingency-hourly basis.
Anne Kelley, Practicing in the New Patent Marketplace, 78 U. CHI. L. REV.
115, 118, 120 (2010); Tom Ewing, Indirect Exploitation of Intellectual Property
Rights by Corporations and Investors: IP Privateering & Modern: Letters of Marque
& Reprisal, 4 HASTINGS SCI. & TECH. L.J. 1 (2012).
155
156
42
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
entities include Intellectual Ventures (IV); RPX, Inc.; Acacia; and
Rembrandt. 157 These entities, each with slightly different business models,
compete on at least some level with contingent fee lawyers. They offer patent
holders an alternative or fallback avenue to obtain money for their patents.
Basically, these entities will compensate an inventor or owner of a patent in
some manner, but the form of compensation varies greatly. Some aggregators
purchase outright the patents. Thus, the original patent owner is paid money
upfront by the aggregator. The aggregator thereafter attempts to monetize the
patent and retain the recovery. 158 A different aggregator strategy is to obtain an
exclusive license for the patent rights, and typically agree to some split in the
recovery, if any, from future enforcement activity related to the patent. The
exclusive license models permits the aggregator to lock in downstream money
without any upfront investment. In short, these aggregators provide a way –
short of suing – which permits inventors or owners to obtain something of
value for their patent rights.
The aggregators compete on this level with contingent lawyers. Some
inventors would prefer an upfront payment to the risks of contingent
litigation. Most of the interviewed subjects do not find the aggregators to be
significant competition on the high value cases. One lawyer characterized the
aggregators as “lower on the food chain.” Continuing, he said
A lot of people shop cases to us and we can’t take the case. We want to be
helpful. We say why don’t you contact so-and-so, and we give them names
of companies who might finance or might want to buy the patent. It is
something we mention to people we have decided not to represent.
Another contingent fee lawyer was more aggressive.
The aggregators are trolls. The only buy cheap patents that are worth
money solely because of the litigation cost extortion.
But a negative view of aggregators was not universal. Some contingent fee
lawyers indicated that the aggregators bought a mixture of strong and weak
patents. For instance, one lawyer said:
they [the aggregators] buy some good patents and some bad patents. They
throw twenty to thirty patents at a defendant. Numerosity makes it hard for
the defendant to know the magnitude of the threat.
Once the aggregators acquire patents or sufficient rights to enforce, their
relationship with contingent lawyers changes. The interview subjects found
Allen W. Wang, Rise of Patent Intermediaries, 25 BERKELEY TECH. L.J. 159
(2010); Chien, supra note 95, at 328-330.
158
RPX, on its website, claims that it “will never assert or litigate the patents in
our portfolio.” Instead, it offers annual memberships to its patent portfolio.
157
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
43
DRAFT – WORK IN PROGRESS
that the aggregators were potential customers. To be fair, not all aggregators
directly enforce their patents through litigation. And aggregators sometimes
litigate by hiring lawyers on a full hourly-fee basis. 159 However, more
commonly, the aggregators engage and rely upon contingent fee litigators to
enforce their patents. In some instances, the aggregators spin-off patents from
their stockpile into a separate patent holding company for litigation, partially
to mask their involvement in the litigation. 160 To litigate, the holding
companies frequently employ contingent lawyers. Consequently, the
contingent firms view the aggregators as both potential customers and
potential competitors.
4. Universities
Universities also sometimes rely upon contingent lawyers. Some
universities manage their patent portfolio through an office of technology
transfer. 161 These offices within the university also often lack the financial
resources to pay hourly billing patent litigators. Contingent representation
solves that problem. Universities are good clients because juries generally find
them sympathetic. A few contingent lawyers reported representing
universities, but most did not. 162
5. Small Patent Holding Companies
Patent holding companies are the final category of potential contingent
Some aggregators never or almost never hire contingent lawyers.
Intellectual Ventures, in at least one instance, has sold a patent to a holding
company which then enforced it. Intellectual Ventures retained a “back end
arrangement” that entitled it to a “percentage of the royalty stream down the road
generated” by the patent. National Public Radio, When Patents Attack, July 22,
2011,
transcript
available
at
http://www.npr.org/blogs/money/2011/07/26/138576167/when-patents-attack
(last
visited Jan. 21, 2012).
161
Kristen J. Osenga, Rembrandts in the Research Lab: Why Universities Should
Take a Lesson from Big Business to Increase Innovation, 59 ME. L. REV. 407
(2007) (noting that it is rare for a university not to have a technology transfer offer to
handle patent matters.)
162
I did not specifically seek out universities or their counsel for this study. The
qualitative interviewing methodology, which does not involve random sampling,
limits my ability to explain whether universities routinely rely upon contingent fee
lawyers.
159
160
44
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
clients. These companies are formed for the primary purpose of owning a
patent and conducting patent enforcement activities. 164 It is unclear how much
patent infringement litigation is brought by holding companies, but one study
has found that in recent years, non-practicing entities had filed 20% of patent
infringement complaints. 165 In some instances, investors or hedge funds
purchase patents and then assign the patents into a specially formed holding
company. The small patent holding company owns a patent or family of
related patents, but not scores of unrelated patents. Admittedly, the line
between this category, small patent holding companies, and the ‘large patent
aggregator’ category is not always clear. Banks or other financing entities can
be involved in the purchase of patents. Others have noted that the litigated
patents spring from a variety of sources. 166
The Article does not wish to enter the debate about the propriety of
patent holding companies. 167 To that debate, this Article makes the modest
and expected observation that these entities typically litigate by hiring
contingent fee lawyers. Contingent lawyers will represent them; however, they
are considered less desirable as clients than individual inventors or small
companies who currently compete or who unsuccessfully attempted to
compete in the marketplace. Furthermore, some of the law firms — typically
the more selective ones — had an aversion to representing non-practicing
entities. 168
163
Patent holding companies, as that term is used herein, do not include entities
created by manufacturing companies to hold their own patents. The definition
herein differs from the patent aggregators because the holding companies are not
part of a larger pool of unrelated patents.
164
To be sure, patent holding companies are non-practicing entities. However,
terms non -practicing entities and the more pejorative term “troll” are not clearly
defined. See, e.g., Mark A. Lemley, Are Universities Trolls?, 18 FORDHAM INTELL.
PROP. MEDIA & ENT. L.J. 611, 612 (2008); Joseph N. Hosteny, Litigators Corner:
Is IBM a Patent Troll?, INTELL. PROP. TODAY, May 2006, at 26, 26–27.
165
Chien, supra note 107, at 1604.
166
Risch, supra note 143, at 37 (finding that the non-practicing entity patents
come from a variety of sources, the two largest of which are product companies and
individuals).
167
There have been many academic articles written about patent “trolls.” See,
e.g., James E. Bessen, Michael J. Meurer & Jennifer L. Ford, The Private and Social
Costs
of
Patent
Trolls,
available
at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1930272 (last visited January 13,
2012); Gerard N. Magliocca, Blackberries and Barnyards: Patent Trolls and the
Perils of Innovation, 82 NOTRE DAME L. REV. 1809, 1810 (2007).
168
As one lawyer put it: “If it is assigned to someone who had enough money to
buy it, no we don’t do it. If it is the company who originally funded the
163
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
45
DRAFT – WORK IN PROGRESS
IV. THE MATURATION OF THE CONTINGENT FEE MARKETPLACE
As the market for contingent services in patent litigation matures, two
contrary forces are present. There will be more “high quality” patents
available for litigation on a contingent basis. On the other hand, changes in
doctrine have made all patents worth less. Below, I explore these two forces
in more detail.
The demand from patent owners to extract value from their patents likely
will continue to increase over time. That increasing demand will in turn drive
the need for contingent fee lawyers in patent litigation. This Article has
provided a detailed snapshot of contingent representation in patent law as it
exists today. As defense lawyers adapt to contingent practice, including by
finding ways to lower the fees they charge to their clients, the landscape for
contingent litigation in patent law will continue to evolve.
On the other side of the ledger, there is no mandatory joinder of
infringers under patent law. If there are five separate infringers of a patent,
the patentee need not sue them at once. 169 Instead, the patentee can sue them
in serial, one after another. He can amass a war chest by settling with some
infringers and using that settlement money to finance litigation with future
infringers. 170 In other contingent areas, this approach is not generally used.
For instance, in the medical malpractice field, most plaintiffs sue the doctors,
nurses, and hospital that are allegedly negligent in the provision of care all
research…that’s fine. They are the innovator. They are the person who created the
invention. But if it is just someone who bought it, we typically don’t deal with the
There are two things why. These patent speculators have become a hot button and
they are fueling a lot of the anti-patent sentiment in the country which have resulted
in legislative things and a very hostile Supreme Court. The Federal Circuit that has
become reactive to anti-patent public sentiment, and I think it is largely because of
this patent speculation so that’s one thing….The second reason is that they are not
sympathetic plaintiffs – it is hard to win for them. Juries don’t have sympathy for
them, don’t want to give them money. Some judges too.…Some judges have great
antipathy toward patent speculators.”
169
In fact, the recently adopted America Invents Act (AIA) prohibits joining
multiple unrelated defendants in a single cause of action. Courts are allowed to
consolidate multiple lawsuits for discovery, and the exact repercussions of the AIA
change are presently unclear.
170
Of course, there are risks with this approach. Each lawsuit involves the
possibility that the patent is held invalid, which bars subsequent lawsuits. Also, there
the patent laws bar damages more than six years before the date of a lawsuit. 35
U.S.C. § 286 (2012).
46
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
together at once. While this is not required by the rules of civil procedure,171
it is the general practice, presumably for efficiency reasons (to avoid
duplicative discovery) or strategic reasons (to entice the defendants to point
fingers at each other).
Business literature sets forth various characteristics of maturing markets.172
As the market matures, its growth slows and there is more competition. 173 The
purchasers — in this context, patent holders — become more sophisticated.174
The focus of competition moves to either lower cost — lower contingent rates
175
— or better service (lawyering skills). Competition increases, including from
176
other fields. Profits may fall during the period in which the market
transitions to maturity, and sometimes the profit decline is permanent. 177 It is
unknown how these general business trends will translate in the market for
contingent representation in patent litigation.
Beyond the general business literature on maturing markets, there are
also two trends, specifically relating to contingent fee patent litigation, that
point in opposite directions. On the one hand, there are more and more high
quality patents which are becoming available for litigation. As used herein,
“high quality patents” is used as contingent lawyers use it: to refer to patents
that are broad in scope and likely to withstand a validity challenge. On the
other hand, the value of all patents has decreased in recent years as a result of
a series of judicial decisions. Below this Article discusses both trends.
High quality patents are becoming more frequently ready for litigation. In
the past, operating companies held large portfolios of patents which were
infrequently litigated. These operating companies maintained their patent
portfolios for defensive purposes. If they were ever accused of infringement
by a competitor, then the operating company could assert the patents as
counterclaims. Patents were also useful as chips in cross-license
arrangements. However, for the very reason that competitors were afraid to
sue them (for fear of counterclaims), the operating companies were wary of
suing competitors. Patents for these operating companies were useful to setup
a situation of mutually-assured destruction. 178
Federal Rule of Civil Procedure 19 does not generally require joinder in these
cases if money damages are sought.
172
Michael E. Porter, COMPETITIVE STRATEGY (1980).
173
Id. at 238.
174
Id. at 238-39.
175
Id. at 239.
176
Id. at 240.
177
Id.
178
Stuart J. Graham & Ted Sichelman, Why Do Start-Ups Patent, 23 BERKELEY
TECH. L.J. 1063, 1065 (2008) (noting that many companies patent defensively to
171
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
47
DRAFT – WORK IN PROGRESS
The recent rise of patent purchases has changed this dynamic. 179 As
mentioned in the Introduction, there have been several multibillion dollar
transactions revolving around patents. This has placed emphasis on obtaining
money for a company’s patents. This emphasis is not on the legal
department, where decisions about patents typically resided. Instead the
pressure is arising in the corporate boardroom where executives are searching
for new ways to generate money. Many companies are considering selling a
portion of their patent portfolio. 180
The operating companies are not selling all of the patents in their
portfolios. They recognize that a core group of patents is still necessary for
defensive purposes, as has always been the case. However, the full arsenal of
patents is not required for this threat. Consequently, the large operating
companies are selling many but not all of the patents, many of which are of
high quality. The patents are sold to entities who are not encumbered by the
counterclaim problem, such as patent holding companies. As one contingent
lawyer explained:
So large companies will go to NPEs [non-practicing entities], saying ‘will
you take this, give me a back end, and go enforce this against our
competitors?’ We’ve seen this a bunch and these NPEs come to us with
these portfolios from big companies.
This trend puts more high quality patents in the hands of non-practicing
entities. The non-practicing entities in turn hire contingent patent litigators,
including high end litigators if the expected damages are sufficiently large.
Additional quality patents available for litigation should encourage more
competition at the highest end of the contingent practice. But the second
trend pushes down on the demand for patent contingent litigation.
Along the same lines are companies with a new interest in monetizing
their patents. The executives read press reports about large patent verdicts or
sales of portfolios of patents. One lawyer summed it up as follows:
create a “game of ‘mutually assured destruction.’”).
179
See Ewing, supra note 156 at 20 (noting a “growth of markets for patents”);
see also HENRY CHESBROUGH, EMERGING SECONDARY MARKETS FOR
INTELLECTUAL PROPERTY: US AND JAPAN COMPARISONS, RESEARCH REPORT
TO NATIONAL CENTER FOR INDUSTRIAL PROPERTY INFORMATION AND
TRAINING (NCIPI) (2006).
180
For instance, Kodak attempted to sell all or part of its patent portfolio to
generate money to avoid bankruptcy. Richard Waters & Chris Nuttall, Battle Set for
Kodak’s
Patent
Portfolio,
Financial
Times,
Jan.
19,
2012,
http://www.ft.com/intl/cms/s/2/0ac1dcc0-42d0-11e1-b756-00144feab49a.html (last
visiting Feb. 1, 2012).
48
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
But there weren’t many people [in 1990] that patented things and then
went out to monetize the patent. That is a new thing. And it is still
increasing. I think that the publicity that has resulted from big verdicts in
cases that people know are contingent fee based like i4i [$280 million
verdict against Microsoft in 2009] or the recent SAP case [$345 million
verdict against SAP in 2011] causes a lot of patentees to think “wow”
maybe I can make some money off of my patent after all.
Pointing in the opposite direction, recent patent case law arguably has
made patents lose value. There are several important judicial decisions in the
last five years, almost all of which devalued patents. First, the Supreme Court
in eBay v. MercExchange substantially diminished the chances for nonpracticing entities to obtain permanent injunctions, even if they prevail on
liability. 181 Next, in MedImmune v. Genentech, 182 the Supreme Court
disadvantaged patent holders by lowering the threshold before courts have
jurisdiction to hear patent challenges, thereby making more difficult for a
patent owner to secure their choice of venue. 183 Shortly thereafter, the
Supreme Court in KSR v. Teleflex in 2007 lowered the previous standard to
more easily allow accused infringers to prove patents invalid as obvious. 184
The Federal Circuit has also issued several decisions on patent damages,
which have made damages more difficult to prove and defend on appeal. 185
Each of these decisions has lowered the value of patents across-the-board. As
547 U.S. 388 (2006) (noting that “An industry has developed in which firms
use patents not as a basis for producing and selling goods but, instead, primarily for
obtaining licensing fees.” J. Kennedy, concurrence).
182
MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007).
183
The Supreme Court in MedImmune rejected the Federal Circuit’s rather
strict test for declaratory judgment jurisdiction in patent cases. Katherine A. Helm &
Gene W. Lee, Call It a Comeback: A Sweeping Change in the Law on Declaratory
Judgment Actions Against Patent Owners, 64 N.Y.U. ANN. SURV. AM. L. 231
(2008) (arguing that MedImmune has substantially “changed the legal landscape”
and made patent owners “increasingly vulnerable to patent challenges on the patent
challenger’s terms.”). The Federal Circuit’s subsequent decision in SanDisc Corp. v.
STMicroelectronics, Inc. highlights the risks to a patentee of pre-filing
communication with an accused infringer. 480 F.3d 1372 (Fed. Cir. 2007). There,
the Federal Circuit affirmed a finding of declaratory judgment jurisdiction for a suit
filed in the defendant’s home court, even when the patentee had expressly informed
the accused infringer that it had no intention of suing for infringement. Id. at 1385.
184
550 U.S. 398 (2007) (rejecting the Federal Circuit’s “rigid” test for
determining whether an invention is obvious, and instead adopting a “flexible” and
“expansive” test.).
185
Lucent v. Gateway, 580 F.3d 1301 (Fed. Cir. 2010) (reversing jury verdict on
damages because of erroneous expert testimony); Uniloc v. Microsoft, 632 F.3d
1292 (Fed. Cir. 2011) (rejecting the 25% rule for reasonable royalty calculations).
181
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
49
DRAFT – WORK IN PROGRESS
one lawyer explained:
But I think the difficulty has been increasing. Whether it will continue to
increase depends upon what the courts and Congress do. The series of
Federal Circuit decisions on damages is just really incredible. They want
more rigor and what it means is that the fees to damages experts are almost
the same as the lawyers’ fees….Then you have the KSR scrutiny [which
makes it easier to prove a patent invalid as obvious], eBay which makes it
harder to get injunctions. The trend has been to make it harder to use the
courts to monetize patents.
In general, this trend by the Supreme Court reduces the expected value
of all patent cases. 186 In turn all cases, on balance, thereby have become less
desirable to litigate on a contingent fee basis. It is difficult to predict now how
these contradictory forces will play out. Because there appear to be more and
more contingent lawsuits and non-practicing entity activity, the first trend may
be outperforming the second.
However, one thing we know — the law has also recently changed in a
manner to discourage cost-of-defense suits. The new America Invents Act,
signed by President Obama in September 2011, prohibits joining multiple
defendants in many circumstances. The new law recites that “[A]ccused
infringers may not be joined in one action as defendants or counterclaim
defendants, 187 or have their actions consolidated for trial, based solely on
allegations that they each have infringed the patent or patents-in-suit.” 188 This
means that the practice of suing multiple unrelated defendants in one cause
of action is prohibited going forward. 189
The AIA change disproportionately affects the “bottom” litigators,
especially those attempting to settle at or below the cost of defense. This is
because if the case is valuable against a variety of defendants, the patentee
would still bring the case against each of the alleged infringers separately.190
A counter-example involves the defense of inequitable conduct, which the
Federal Circuit curtailed in 2010. Therasense v. Becton, Dickinson and Co., 593
F.3d 1289 (2010). The AIA also permits Supplemental Examination, which permits
patentees to more easily remedy certain defects that previously could form the basis
of an inequitable conduct charge. 29 U.S.C. § 257 (2011). A second counterexample is i4i v. Microsoft, where the Supreme Court rejected an attempt to lower
the burden of proof required to invalidate a patent. 131 S.Ct. 2238 (2011).
187
The term “counterclaim defendants” appears to be a typographical error, and
probably should be read as “counterclaim plaintiffs.”
188
America Invents Act, 29 U.S.C. § 299 (2011).
189
The AIA provision on joinder is not retroactive. That means that the cases
presently pending with multiple defendants will continue.
190
Filing separate cases against each defendant adds costs because a separate
filing fee is due for each lawsuit. If the lawyers are not admitted to the court where
186
50
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
The unfiled cases, which will disappear from the system, are those which are
less valuable. 191
CONCLUSION
This Article explains why there has been a rise in the use contingent fee
representation in patent litigation. 192 It also paints detailed, qualitative pictures
of the lawyers involved in this practice. Contingent fee practices in patent law
can help refine our model of contingency fee litigation in general. For
instance, patents do not fit the general model of contingency because they are
frequently asserted against multiple defendants. Settlements from early
lawsuits can be used to both fund later lawsuits and bolster the strength of the
underlying patent. Additionally, a final judgment that the patent is invalid in
any lawsuit ends all subsequent lawsuits. Because of the direct link between
multiple lawsuits, contingent lawyers in the patent field frequently evaluate
additional factors other than the simple cost/benefit of the lawsuit at issue.
Furthermore, now that the outlines of the patent contingent industry have
been provided, further quantitative empirical work can be undertaken. There
the suit is filed, then a pro hac vice application and fee must be paid for each case.
In addition, cases with a single defendant may be more likely to be transferred away
from the plaintiff’s choice of forum.
191
Even before the adoption of the AIA, the courts were already attempting to
adjust their procedures to handle cost-of-defense lawsuits. Judge Leonard Davis in
the Eastern District of Texas altered his case management orders in lawsuits “where
a plaintiff asserts questionable patent claims against a large number of Defendants to
extract cost of defense settlements" with the costs of defense being driven by the
quick discovery deadlines of the local patent rules.” Case Management Order,
Uniloc USA, Inc. v. Sony, et. al., 6:10-cv-73, May 20, 2011; see also Case
Management Order, Raylon, LLC v. Complus Data Innovations Co., 6:09-cv-355.
In those cases, he moved the claim construction forward to permit the Court to
evaluate the merits of the dispute early and at a lower cost to the defendant. See also
Rader, supra note 79 (noting that “trolls litter the patent system with marginally
meritorious lawsuits” and recommended that attorneys’ fees being assessed as “a tool
to discourage cases that are brought only to obtain revenue from litigation avoidance
instincts”) (available at http://www.patentlyo.com/files/raderstateofpatentlit.pdf) (last
visited Dec. 19, 2011).
192
It is unclear what proportion of patent lawsuits is handled on a pure
contingent fee basis. Subjects from the interviews provided answers between 1% and
50%. The 2011 AIPLA Economic Survey Benchmark Tool indicates that
respondents noted that 2.5% of their services were billed on a contingent basis.
(Question 35(c)).
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
51
DRAFT – WORK IN PROGRESS
is nothing in the filed court records within a case file or docket to indicate
whether a patent lawsuit was brought on a contingent basis. However, through
careful analysis of the parties, law firms, and litigation activity, it is possible to
make estimates of which cases are so litigated.
While qualitative interviews like those described in this Article may
provide a richer and fuller account, some of the further quantitative analysis
will be useful to those studying the patent system. For instance, analysis
should be conducted upon the patents asserted in the cost-of-defense
lawsuits. Whether these patents are weak, as claimed by many, is of vital
importance in assessing the patent litigation system. If there a substantial
amount of litigation is of “weak” patents, then patent litigation may not
further the goal of encouraging innovation. On the other hand, if these patent
holders are merely providing discounted licenses — “leaving money on the
table” as one lawyer put it — then infringers are benefitting by not paying the
full value to the patentee. Separately, analysis of the “high quality” patents
asserted by the most selective firms can aid in understanding patent value.
Future research can also inform us about litigation and attorney-client
relationships more generally. By empirically analyzing and comparing
contingent cases and hourly-billing cases, we can understand more about the
effectiveness of contingent practice in patent law. These findings will aid in
the larger debate about whether contingent representation in general should
be encouraged or discouraged.
52
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
METHODOLOGICAL APPENDIX
In 2010 and 2011, I conducted in-depth interviews with forty-one people
involved in contingent fee representation in patent litigation. All of the
subjects were promised confidentiality, including for themselves and their law
firms or companies. Below I provide some basic demographic information
about the subjects, describe how I located them, and set forth the basic areas
of questioning.
Most were lawyers who had handled at least one patent infringement case
on a contingency fee basis. While the majority of lawyers were from Chicago
(22), lawyers from nine different states were interviewed. These included
lawyers from California; Indiana; Kansas; Massachusetts; Missouri, Ohio;
Texas; and Washington DC.
These lawyers worked in a variety of settings. Nineteen of the lawyers
practiced at small firms whose practice was all or primarily contingent fee
litigation. Twelve of the lawyers worked at large general practice firms such as
American Lawyer 100 firms or at well-established intellectual property
boutique law firms. These second type of lawyers frequently handled some
matters on an hourly billing basis. However, each of the interviewed lawyers
handled at least one case on a contingent fee basis. I interviewed at least five
lawyers in each of the four categories I identified in the Article. To broaden
my perspectives to cover all sides of contingent practice, I interviewed lawyers
who represented defendants in cases which were known or suspected to be
contingent cases.
The attorneys interviewed were all experienced litigators. They had
practiced law for an average of twenty five years, although not all of that time
as contingent fee lawyers. Only one attorney interviewed had less than twelve
years of experience as an attorney. The maximum experience was forty four
years, although most of that time was performing hourly billing work, not
contingent work. The majority of the subjects had been in practice for twenty
years or more. The subjects were mainly men, with only three women in the
sample. At least part of the gender imbalance can be explained by the gender
imbalance in patent law more broadly. Many patent litigators have technical
undergraduate backgrounds, and there are fewer women with such
backgrounds than men. 193
I also interviewed several in-house lawyers with experience with
contingent lawyers in patent cases. These in-house lawyers either (i) managed
Sarah-Jane Adams, Breaking Through the Glass Ceiling, Intellectual Asset
Magazine, Oct./Nov. 2008, at 49 (“To reach the top of the patent world it is highly
likely that you will need a deep understanding of both technology and the law – two
areas that have traditionally attracted far fewer women than men.”).
193
10-Feb-12]
CONTINGENT FEE PATENT LITIGATION
53
DRAFT – WORK IN PROGRESS
the defense of patent litigation for which they knew or suspected that the
lawyers were being compensated on a contingent basis; or (ii) hired a law firm
to represent their employer as a plaintiff in a case on contingent fee basis
lawyers.
There are several large patent aggregation companies in the market place.
I interviewed people inside some of these companies. I also interviewed
some non-lawyers who work at hedge funds or banks. These entities have
some involvement or interest in patent litigation, such as loaning or investing
capital in exchange for a percentage of the recovery from a lawsuit. Finally, I
interviewed several lawyers who handled other types of “complex” litigation
on a contingent fee basis. These included one lawyer who handled exclusively
class action securities fraud cases and another lawyer who handled exclusively
antitrust matters.
To locate the lawyers, I began with lawyers whom I knew handled
contingent matters in Chicago. I have substantial access to these people
because both I practiced law for over ten years in Chicago and I remain active
in the local intellectual property bar. From there, I found additional people
to interview from a variety of sources. The most common source was a
recommendation from another lawyer involved in patent litigation. Many
times a contingent lawyer would refer me to another contingent lawyer. I also
located additional interview subjects by web searches of firm directories, news
stories, and identification of counsel from the dockets of cases likely brought
on a contingent fee basis.
Nearly all of the lawyers I approached agreed to be interviewed. The one
exception was people at hedge funds. This may have been because I lacked a
strong personal connection with most of people I approached, and as a
lawyer and academic, I am far removed from that field. In any event, fewer of
these people responded to my overtures, let alone agreed to be interviewed.
I conducted the interviews in person whenever possible. This included all
of the Chicago lawyers. The remainder of the interviews was performed over
the telephone. The average interview lasted approximately one hour. 194 The
shortest interview lasted forty minutes and the longest for 150 minutes.
The interviewed were in-depth and semi-structured. 195 Semi-structured
means that I had a general list of topics to cover with each person, although I
deviated from the general list based upon the responses provided by the
A great majority of the in-person interviews were recorded (11 out of 14).
Many of the phone interviews where recorded as well.
195
There are many strong references on qualitative interviewing methodology.
For those new to the subject, two reference to begin with are Tom Wengraf,
QUALITATIVE RESEARCH INTERVIEWING (Sage 2001) and Steiner Kvale, DOING
INTERVIEWS (Sage 2007).
194
54
CONTINGENT FEE PATENT LITIGATION
[10-Feb-12
DRAFT – WORK IN PROGRESS
lawyer. The general topics were how potential clients were located, how cases
were analyzed and considered for selection, how contingent fee agreements
were negotiated, how cases were litigated, how cases were settled, and how
aggregators and hedge funds were situated in the contingent marketplace.
Based upon the responses provided by the subjects, detailed follow up
questions were asked and other topics also were discussed.